Reuters logo
MONEY MARKETS-Surprisingly high ECB repayment jolts rates higher
January 25, 2013 / 2:26 PM / 5 years ago

MONEY MARKETS-Surprisingly high ECB repayment jolts rates higher

* Banks to repay 137 bln euros next week

* Higher-than-forecast figure bumps up money market rates

* Excess cash could be kept high by ECB weekly operations

By Emelia Sithole-Matarise

LONDON, Jan 25 (Reuters) - Short-term money market rates rose on Friday after euro zone banks said they would repay more of the cheap European Central Bank funds that have kept the financial system afloat than the markets expected.

Banks plan to return 137 billion euros of the 490 million the ECB handed out in late 2011, the central bank said, beating average estimates on the early repayments of around 100 billion euros in a Reuters poll early this week.

Euribor futures , which price in expectations of where the market expects interbank rates to be in future, fell across the 2013-2015 strip, with longer-dated contracts falling as much as 12 basis points on the day, pushing their rates up. Short-dated German bond yields rose to a 10-month high of 0.28 percent, briefly above U.S. counterparts.

Overnight Eonia forward contracts, which lock in an overnight borrowing rate over a longer period, jumped across the 2013 curve, with one-year Eonia back at a six-month peak of 0.22 percent.

Many in the market expected short-term rates to remain elevated or even go higher in coming weeks as markets price in the possibility that excess cash may start to dwindle more than expected if banks pay back big chunks of the total 1 trillion euros the ECB handed out in later 2011 and early 2012.

Spot overnight rates are expected to remain at their ultra low levels, however, given the belief there will still be enough cash in the system through 2013 to keep them anchored near the ECB’s zero deposit rate which acts as a floor for the market.

“Today’s number...shows that the repayment is not only coming from core banks...Given that Italian and Spanish banks took a majority of the funds, they could be repaying some too,” said Alessandro Giansanti, a strategist with ING.

“That’s a point that could drive the total repayment north of the 300 billion euros total expected (for 2013) and that could start to have meaningful effect on the excess liquidity in the system that’s why we expect further steepening on the money market curve,” he said.

Historically money market rates, which effectively underpin what banks charge firms and consumers for loans, only tend to move freely once excess cash drops below 200 billion but the lengthy repayment timeline has left them in uncharted water.


Anything higher than the 300 billion euro initial estimated payback this year would more than halve the amount of so-called “excess liquidity” sloshing around the system that has kept bank-to-bank lending rates pinned at record low levels for almost a year.

However, that surplus was likely to remain above the 200 billion mark with many in the market expecting some banks, especially from the euro zone’s weaker periphery, to roll over the longer-term financing into the ECB’s three-month tenders

“The high liquidity surplus, along with the ECB’s commitment to support banks maintaining the ‘fixed rate full allotment’ procedure at its refinancing operations, should limit any possible widening,” BNP Paribas stragesists said in a note.

“However, the market is likely to remain sensitive to the next announcement and therefore, volatility on EONIA rates, especially at the medium/long tenors, is likely to remain high.”

The ECB announcements give no detail on which banks are repaying the funds early, but some market participants said Friday’s number indicated some banks from Spain and Italy - who took the lion’s share of the initial ECB funds - might be prepaying too.

Confirmation of this could lift confidence in the market that some those ailing banks were finally weaning themselves off ECB life support and back onto private lending markets.

“From a fundamental perspective, how positively we would interpret more aggressive LTRO repayments would depend on which banks are repaying the loans. Accordingly, we are reluctant to read too much into today’s aggregate data,” said Michael Symonds, financials credit analyst at Daiwa Capital Markets.

“More important will be the granular detail regarding the repayments - by country and by institution - that will filter through in the coming weeks.”

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below