Banks to pay back chunk of crisis loans

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Banks will repay more than 130 billion euros of crisis loans to the European Central Bank next week, handing more cash back earlier than expected in a sign at least parts of the financial system are returning to health.

The ECB made over 1 trillion euros of ultra-cheap three-year loans to banks in twin lending operations in December 2011 and February 2012 – a move ECB President Mario Draghi said had “avoided a major, major credit crunch”.

The eurozone’s central bank said yesterday that 278 banks would repay a total 137.2 billion euros of the December loans at the earliest opportunity on January 30, although it did not name them. A total of 523 banks tapped the first of the two long-term loans, known as LTROs, just over a year ago.

German debt prices fell and banking stocks and the euro rose on news of the early repayment, which exceeded the 100 billion euros forecast in a Reuters poll of traders. Banks can repay the money early on a voluntary basis weekly from now on. Repayment of the second LTRO starts on February 27.

“This exceeded expectations, I expect the pace to slow down considerably in the next week,” said Nordea analyst Jan von Gerich. “Quite a few stronger banks paid back as soon as possible. I don’t think repayments will reach a level where overnight interest rates will start to move up.”

The large early repayment will be welcome news to some ECB policymakers, who were concerned about the increased risks the central bank carried on its balance sheet with the loans.