LTRO Post-Mortem: Who Repaid What, As European Excess Cash Is Now Reabsorbed
Before today's NFP number, the biggest news of the day was the substantial slowdown in European LTRO repayments, which ground to a halt from last week's repayment of €137 billion, to only €3 billion. Whether this is because banks decided that there is no more need to telegraph their health by keeping "excess liquidity", or because they actually did need to €878 billion in additional LTRO funding is unclear for now, although the overnight nationalization of a Dutch bank coupled with a return of Italian bank problems where Monte Paschi is next on the nationalization conveyer indicates that as always, nothing has been fixed in Europe. A full post-mortem of today's second LTRO repayment comes from Goldman, which concludes that as of the two repayments, the excess cash in the European financial sector is now in tune with the open market operations' reduction. When the next scramble for liquidity hits, it means that banks in the continent will once again start crawling to the ECB for incremental cash.
From Goldman Sachs:
€3 bn in the second putback, €878 bn left
Today (February 1) at 11:00 GMT, the ECB announced the LTRO funds returned to it through the (second) weekly put-back option. Banks repaid €3 bn, leaving €878 bn outstanding. The scope of this week repayment‘s is close to nil. Last week, banks used the initial repayment option to send a "health signal" and repaid €137 bn. Going forward, our expectation is for repayments to track today’s tempo, as banks carefully weigh funding costs achievable through market bond issuance with those of the ECB.
Spanish banks repay €41 bn…
Spanish banks under our coverage will repay €41 bn of LTRO in January, or c.1/3 of the initial take-up. This is essentially due to Santander and BBVA (€32 bn), for which funding conditions have improved most. Domestic banks will repay a total of €9 bn or 12% of initial take-up. While a positive from a signaling perspective, we view the Spanish repayments as earnings dilutive, and risky. We believe it would have been preferable for Spanish banks to have held onto the ECB funds for longer.
… some core banks exited LTRO all together
Core banks are likely to be the largest source of repayments. Commerzbank and KBC have announced their LTRO return to the ECB, and we expect further similar announcements together with the results season.
Signaling and maturity are crucial
Without time pressure, a putback decision is driven by economics. We believe that for peripheral banks, LTRO money continues to offer an attractive reinvestment proposition.
Moreover, we believe the banks will use 4Q2012 results to outline a longer-term path of repayments, in order to signal their ‘resilience’.
Finally, with two years remaining, LTRO remains an attractive facility for the majority of banks, which cannot achieve comparable terms in the funding market. But in a year’s time, this is unlikely to be the case. We believe a longer-term exit path will be the most likely outcome.
And the accompanying charts.