10 June 2016

Reuters: Euro banks repay most ECB loans to make room for cheaper ones

The ECB will be offering free cash to banks later this month to improve lending, and with it economic growth, in the euro zone. But the fact that only 86 percent of the old debt was repaid could indicate appetite for the ECB's new Targeted Long-Term Refinancing Operation (TLTRO II), where banks will be given free credit, may be low despite the favourable terms.

Banks have decided to repay 367.86 billion euros of the 425 billion euros worth of loans they had taken out in the ECB's first TLTRO (TLTRO I) over the past two years. The money will be repaid on June 29.

The banks will now be able to take out four-years loans at a zero interest rate at the ECB's TLTRO II auction on June 22, compared with TLTRO I's 0.05 percent. They then have a chance of getting back 4 euros for every 1,000 euros borrowed if they increase lending to euro zone households and companies.

The new TLTRO was presented in March as a potent tool to increase euro zone lending by rewarding banks for passing ECB cash to the real economy.

But demand is expected to be low, money market dealers predicting banks would borrow a total 451 billion euros, just under 25 billion euros more than the outstanding amount.

That is partly because many banks, particularly in countries such as Germany, are already sitting on excess cash from the ECB's 1.74 trillion-euro money-printing programme while credit demand remains low.

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