Euro-zone banks to return $308b in cheap loans to ECB

Bloomberg

Banks will return €296.3 billion ($308 billion) of cheap loans to the European Central Bank after their terms were toughened to help the battle against record inflation.
The repayment represents just under 15% of the total outstanding amount of so-called TLTRO loans, which were used during the pandemic to keep credit flowing to households and businesses. The median forecast in a Bloomberg poll this month was for €600 billion to be given back. The projections ranged from €200 billion to €1.5 trillion.
German two-year bonds erased losses and outperformed equivalent interest-rate swaps after the data. The spread between yields and swap rates widened two basis points to around 84 basis points.
The smaller-than-expected repayment may not be what the ECB was hoping for. Officials have fretted that the shift in economic conditions since the TLTRO program was rolled out means the loans risk distorting their efforts to tame soaring prices, while also worsening a shortage of collateral needed for money markets to operate effectively.
Officials in October announced an increase in the cost of TLTRO financing from November 23, putting a stop to banks earning a risk-free income by parking cash from the program back at the ECB. The retroactive measure sparked complaints by some lenders.
Despite ECB Vice President Luis de Guindos telling Bloomberg that he expected the amount returned by banks to be “sizable,” analysts had offered reasons why repayments may initially be low.
TLTROs remain a cheap funding option compared with sources like deposits, and could still be worth keeping for regulatory purposes such as stress tests, Barclays economists Ludovico Sapio and Paola Sabbione said this week in a report to clients.
Banks will have further options for reimbursement in each of the next four months, and then on a quarterly basis.
The ECB has hiked its key interest rate at the most aggressive pace in its history to curb inflation that at 10.6% last month is more than five times the 2% target. President Christine Lagarde said earlier that borrowing costs may need to be lifted to levels that restrict economic expansion in order to drive down inflation.
The ECB is also set to discuss how to shrink the roughly €5 trillion stash of bonds purchased as stimulus during recent crises — a process known as quantitative tightening.