Frankfurt: New evidence suggested on Friday that the Eurozone might finally be emerging from its crisis, with a European Central Bank announcement that banks were starting to repay some emergency loans ahead of time.
In an unprecedented move a year ago, the ECB pumped more than €1 trillion ($1.3 trillion, Dh4.77 trillion) into the banking sector to avert a looming credit crunch in the 17 countries that share the single currency.
At the time, the ultra-cheap three-year loans — known as long-term refinancing operations or LTROs — were credited with marking a turning point in market sentiment towards the embattled euro.
The LTROs were launched in two batches, in December 2011 and February 2012, and both included provisions to allow early repayment after one year, with the first repayment window opening on January 30 and the second on February 27. After that, repayments can continue on a weekly basis, depending on demand.
In a widely watched announcement on Friday, the ECB said that 278 banks would repay €137.16 billion of the first €489 billion LTRO on January 30, which is much more than the €100 billion expected by analysts.
Some experts believe the magnitude of the repayments is a sign of the improved health of the financial markets as it suggests banks are enjoying better access to funding. The euro certainly spiked higher on the news, rising to $1.3436.
Nevertheless, other observers warn of possible problems further down the line if it emerges that only banks in the stronger core countries such as Germany repay the loans, while banks in still vulnerable, peripheral countries — such as Spain and Italy — become ‘stigmatised’ for not being able to repay.
The ECB did not provide details as to the nationality of the 278 banks which have decided to repay the cash, but some banks have made their intentions known via press statements.
Berenberg Bank chief economist Holger Schmieding said it was “no wonder that the euro exchange rate is going up. We see the voluntary return of excess liquidity to the ECB as a strong vote of confidence in the euro. Most of the funds will be returned because banks no longer need them.”
Private funding markets had reopened since the ECB unveiled its other anti-crisis weapon, a bond purchase programme, last August, the expert said.
“The large repayment shows how the ECB’s intervention is successfully healing the eurozone financial system,” Schmieding said.
But Annalisa Piazza, at Newedge Strategy, was more cautious, suggesting that “markets might start to price in risks of tighter liquidity conditions in the future, should the repayment continue at the same pace.”
Nevertheless, the Eurozone has seen other positive news this week, with private business activity across the Eurozone — as measured by the widely watched Purchasing Managers’ Index or PMI — hitting a 10-month high in January.
In Germany, the region’s top economy, both business and investor confidence is also rising sharply.
“With business confidence recovering faster, at least in Germany, and the financial system healing, the resilience of the Eurozone to future shocks is slowly growing,” said Schmieding. “Serious risks remain... but they should be more manageable than in the last two years.”
Speaking to the world’s top business and political leaders at the World Economic Forum in Davos, ECB chief Mario Draghi hailed what he called “relative tranquility” on the financial markets and said: “All the indices point to a substantial improvement of financial conditions.”
But Draghi also warned that it was too early to declare the battle over. “Are we satisfied...?” he said. “I think to say the least, the jury is still out. Because all in all, we haven’t seen an equal momentum on the real side of the economy and that’s where we will have to do much more.”
