Euro loan repayments may slump over crisis

The ECB flooded euro area money markets with over a trillion euros through two long-term refinancing operations (LTROs) in December 2011 and February 2012, and banks have since taken the opportunity to return that cash two years early.

That resulted in the repayment of 137.2 billion euros (£118.1bn) for the first LTRO at the end of January, and 61.1 billion euros for the second round on February 27.

Since those initial repayments, weekly returns of both have dwindled. On Friday, the ECB said banks will repay 12.5 billion euros of the two loans this week.

That amount is expected to fall even further, with a poll of 26 money market traders calling for banks to return 3 billion euros of the first LTRO and 5 billion euros of the second one next week.

“The bigger banks have already repaid, except probably those in the southern (European) countries,” said one money market trader.

“They’re holding back because they are also watching the government bond yield spreads and if financing conditions deteriorate further down the road, if the political turmoil in Italy continues.”

Italy could be inching closer towards another election within months after centre-left leader Pier Luigi Bersani issued an ultimatum to anti-establishment 5-Star Movement boss Beppe Grillo to support a new government or return to the polls.