Bundesbank looks ahead to ECB "exit" as LTROs repaid

FRANKFURT Fri Feb 22, 2013 12:07am GMT

European Central Bank President Mario Draghi testifies before the Committee on Economic and Monetary Affairs at the European Parliament in Brussels February 18, 2013. REUTERS/Eric Vidal

European Central Bank President Mario Draghi testifies before the Committee on Economic and Monetary Affairs at the European Parliament in Brussels February 18, 2013.

Credit: Reuters/Eric Vidal

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FRANKFURT (Reuters) - A bumper return of 3-year loans to the ECB would boost the case for it exiting crisis mode, a top Bundesbank official said ahead of Friday's news on how much banks will hand back at a repayment window next week.

Joachim Nagel, in charge of market operations at the German central bank, stressed, however, that it was still unclear when the exact time for an exit would be as the European Central Bank's monetary policy has not yet worked evenly across the 17 euro zone countries.

The ECB lent banks a total of more than 1 trillion euros (864.8 billion pounds) 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 ECB is now giving banks the chance to repay the funds early. Last month, it began allowing them to pay back the first of the twin loans. Friday's announcement will detail how much of the second they plan to return at the first chance on February 27.

"If the excess liquidity in the banking system abates significantly, then it would be time to consider an exit from the non-standard measures brought on by the crisis," Nagel told Reuters, without giving a specific level.

"It is not yet completely clear when exactly it will be time for the exit. The markets and the financial system are still far too fragmented for that. I warn against declaring an end to the crisis despite the calmer phase on markets in recent months."

Reuters calculations show excess liquidity in the euro zone - the level of cash beyond what banks need to cover their day-to-day operations - has dropped since the first chance to repay the first loan on Jan 30.

The excess measure has fallen to just under 500 billion euros from some 600 billion euros prior to the first repayment.

ECB President Mario Draghi said earlier this month that even after the repayment of the second 3-year loan, excess liquidity should remain well over 200 billion euros, which he said would confirm "the monetary policy stance as being accommodative".

The market-driven unwinding of the ECB crisis measures stands in contrast to the policies being pursued by central banks in the United States and Japan, which are looser.

This policy contrast has helped drive up the euro, which is also supported by investor confidence that the bloc will hold together after Draghi's pledged last July that the ECB would do "whatever it takes" to preserve the single currency.

A Reuters poll pointed to banks repaying 130 billion euros of the second 3-year loan - or long-term refinancing operation (LTRO) - at their first opportunity to do so on February 27.

Early repayment is a badge of honour for banks anxious to impress investors and ratings agencies and distance themselves from more cash-strapped rivals.

Banks opted to repay 137 billion euros of the first LTRO at the earliest opportunity on January 30. A total of 523 banks tapped the first of the two long-term loans, and 800 tapped the second.

(Reporting by Eva Kuehnen and Paul Carrel; editing by Ron Askew)

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