Bloomberg’s consensus forecast before the announcement had been for repayment of about €85 billion, so some analysts, including those at Barclays, began to speculate whether the market would start to price in the possibility that repayment could bring the liquidity surplus below €200 billion, heralding a tightening of liquidity conditions and upward pressure on Eonia (the eurozone overnight lending rate).
At Morgan Stanley, however, analysts had expected between €100 billion and €200 billion of repayment and took the view that even repayment at the very top end of that range would have little impact on the market, as excess liquidity would stay above €500 billion.
Indeed, there was a general sense of confusion after the ECB’s announcement and very little consensus emerged as to what the repayments actually meant. Markit declared bank credit default swap spreads to be "strangely unmoved by the news", adding that while Italian and Spanish banks "might have been expected to rally", they didn’t.
The market loves an anniversary, but the weight of expectation that had built towards the first repayment date for the three-year ECB loans transformed it into a bellwether for the health of the eurozone banking system, which it isn’t. Attempting to extrapolate much from the figure could turn out to be a fool’s errand.
To recap, the two three-year LTRO tenders by the ECB are repayable this year from January 30 for the first €489 billion tender and February 27 for the second €530 billion tender. After these dates, borrowers are able to repay on a weekly basis. That €137 billion of the first €489 billion has been repaid is a positive sign, but who repaid and why?
As Euromoney went to press the ‘who’ was still rather sketchy. This will become clear as the various central banks release further information, but some banks made their intentions public before the repayment date: Belgium-based KBC Bank announced that it would repay all of its €8 billion borrowing, the UK’s Lloyds was understood to be ready to repay 75% of its loans, Germany’s Commerzbank had previously stated that it would repay its €15 billion loans at the earliest opportunity. Barclays and Deutsche Bank will probably pay down borrowing and French banks BNP Paribas and Société Générale were rumoured to be planning partial repayments.
The real litmus test will be the extent of repayment from the periphery. Spain alone accounts for 41% of the total LTRO uptake, with Italy accounting for 25% – the two countries are therefore responsible for two thirds of the borrowing. But repayment from the periphery is expected to be low, maybe as little as 10% of the total figure. Italian lender UCI Banca has already said that it will not repay, but Spanish lenders Banca Sabadell and Bankinter were planning small repayments. Santander will likely repay and BBVA confirmed that it repaid a "relevant" amount.
This comes to the ‘why?’ Even with the improvement in market sentiment, banks are not going to fund more cheaply than the ECB’s 75 basis points. Morgan Stanley calculates that northern eurozone banks have about €465 billion on deposit at central banks, of which Germany and France account for €340 billion. Much of this is earning negative carry, so using it to repay LTRO debt makes sense. Peripheral banks do not have such deposits, and the question is how much avoiding the stigma of non-repayment is worth and whether they can afford it.
For those that can’t, they will probably get creative. Status can be gained by a LTRO repayment – but funds can then be borrowed again under the ECB’s weekly main refinancing operation (MRO). CreditSights points out that banks tendered to receive €125 billion in the MRO that settled on January 30 at the same time as 278 of them were repaying €137 billion of the LTRO. A simple switch from one to the other does not send quite the positive signal that repaying banks would like to claim.
Those LTRO repayments that have taken place are a positive development in as much as they build on the much-improved eurozone sentiment that has enabled many peripheral borrowers to tap the market so far this year. What they are not is a clear signal of the health of the various banks in the region – no matter how much some lenders would wish them to be.