FRANKFURT Banks began early repayment of crisis funds to the European Central Bank on Wednesday, shrinking the ECB's balance sheet while the world's other big central banks are still spending to support their economies.
Combined with lacklustre demand for weekly funding, it helped boost the euro to its highest level against the dollar since November 2011.
An ECB survey separately showed that banks' access to market funding improved in recent months following the ECB's pledge to do what it takes to preserve the euro and the launch of a new bond purchase programme.
However, new capital requirements and financial regulation led them to toughen loan standards.
On Wednesday, banks returned about a quarter of the 489 billion euros they borrowed roughly a year ago in the first of the ECB's twin three-year loan offerings in a sign that they are less reliant on the crisis funds.
The unwinding of the ECB's crisis loans operations is in stark contrast to the policies of the Bank of Japan, which earlier this month doubled its inflation target to 2 percent and made an open-ended commitment to buy assets from next year.
In the United States, the Federal Reserve is expected to keep asset buying at $85 billion a month when it ends a policy meeting on Wednesday and to retain a commitment to hold interest rates near zero until unemployment falls to 6.5 percent.
But in Europe, ECB President Mario Draghi dashed hopes for looser monetary policy by saying earlier this month "positive contagion" from improved markets and stabilising economic indicators would support a recovery later this year.
So far, this has not filtered through to the economy.
Banks made it harder for firms and consumers to borrow in the fourth quarter and expect to toughen loan requirements further in the months ahead. Demand for loans also fell and is expected to decreased further, which bodes ill for the recovery.
"This illustrates the double credit whammy in the euro zone: Tightening of credit conditions on the supply side and a fall in demand, it's a squeeze on both sides," said Carsten Brzeski, economist at ING.
"For the time being, this shows weak economic growth."
Looking at the figures country-by-country, they told the now-usual story of large discrepancies between north and south.
Almost two-thirds of banks in Italy reported a fall in demand for corporate loans in the fourth quarter and net 30 percent of banks in Spain said the same. In Germany, only 3 percent of banks said that.
Almost 20 percent of German banks see demand for mortgage loans rising in the first quarter, while two-thirds of Spanish ones and all Portuguese banks expect a fall in January-March.
"(The) crisis of the real economy is far from being over and these numbers support the ECB's view that growth will only return in the second half of the year," ING's Brzeski said.
Banks repaid a larger than expected amount of crisis funds they took about a year ago from the ECB. The lacklustre take-up of this week's funding operations, meanwhile, shows that banks are not simply shifting to shorter maturities.
The amount of excess liquidity in the banking system is expected to drop by around 140 billion euros as a result, but will remain firmly above 400 billion euros, which analysts expect will temper a rise in market interest rates.
ECB Executive Board member Peter Praet also stressed on Tuesday that the central bank would provide enough liquidity for money markets to function effectively.
In general, less cash in the banking system reduces the ECB's balance sheet and is effectively a tightening of monetary conditions, which has the same effect as a fractional interest rate hike.
Already, the euro has risen against other major currencies and hit a $1.3563 on Wednesday, the highest since November 2011. It is up about 2.7 percent against the dollar this year.
For a copy of the survey, click on: here
(Reporting by Sakari Suoninen. Editing by Jeremy Gaunt.)