FRANKFURT In the first step to unwinding its crisis policy measures, the ECB announces on Friday how much of 489 billion euros ($649 billion) in ultra long-term loans it funneled to banks in late 2011 they are opting to repay early.
The European Central Bank lent banks a total of more than 1 trillion euros in twin 3-year, ultra-cheap lending operations in December 2011 and February 2012 - a ploy that ECB President Mario Draghi said "avoided a major, major credit crunch".
The operations gave banks the chance to repay the loans early and on Friday the ECB will announce how much of the money borrowed in December 2011 banks plan to pay back at their first opportunity to do so. The payments are settled on January 30.
A Reuters poll on Monday pointed to banks returning around 100 billion euros of the first round of the cheap loans, so-called LTROs (long-term refinancing operations) on January 30.
"It's positive because it shows that banks are dependent less on the ECB for liquidity, interbank markets are resuming, the financial system is healing," said Berenberg Bank economist Christian Schulz.
Early repayment would be a badge of honor for banks anxious to impress investors and rating agencies and distance themselves from more cash-strapped rivals.
BNP Paribas (BNPP.PA), Commerzbank (CBKG.DE) and Santander (SAN.MC) are among a number of banks wanting to repay the loans to distinguish themselves from weaker rivals.
However, a risk is that in their eagerness to do this, some banks may overstretch themselves.
"The one thing that would worry me is that this attributes a stigma to using the LTRO," said Schulz. "Banks have an incentive to repay to show that they are healthy in the market. But some banks may be tempted to repay even though they shouldn't."
Benoit Coeure, in charge of market operations on the ECB Executive Board, sought to allay such concerns last Friday by playing down the chance of banks repaying a massive chunk of their LTRO cash this month.
Coeure also said excess liquidity in the euro zone remained very high. Reuters calculations show there is around 586 billion euros more money in the market than is required for it to operate effectively.
Withdrawing some of that excess could put upward pressure on market interest rates, which edged up ahead of the repayment. [ID:nEAP50PO00] Money markets are bracing for volatile trading in coming weeks which could lift short-term rates as banks start paying back the loans.
"It is likely to be banks in the core countries that are going to repay and reliance on (central bank) funding in the periphery is going to remain quite high," said Nomura economist Nick Matthews.
(Additional reporting by Eva Kuehnen; editing by Stephen Nisbet)