A month ago, on January 25 when the window to commence LTRO repayments was opened, European banks, with much pomp and circumstance, announced that 278 banks repaid a greater than expected €137.16 billion of the €1+ trillion in LTRO funding disbursed in early 2012. This was taken as a sign of European bank stress dissipation and financial stability, and furthermore served to push the EUR much higher on expectations that the ECB balance sheet would rapidly contract even as every other central bank balance sheet was expanding. It also ignored the fact that ongoing broad economic weakness in Europe required and still requires a weaker currency, not a stronger one (however too weak, and you get "redenomination risk", etc, etc). As it turns out, like everything out of Europe, the "strength" indicated by the first LTRO2 repayment was merely a sham, and moments ago when the ECB announced the results of the second 3 year LTRO repayment option, the news was a big dud: instead of the €122.5 billion expected to be paid back, European banks repaid just under half of this amount or €61.1 billion, spread among 356 banks - an average of just €0.17 billion per bank.
The result was an immediate slide in the EUR currency as questions once again arise: were European banks just faking it; is European liquidity suddenly (and still) insufficient and do banks still need much more ECB support than expected; is the ECB balance sheet contraction now officially over especially with rumblings yesterday by assorted ECB officials that a negative interest rate is conceivable, and with JPM now expecting another rate cut imminently by Draghi? Most importantly: is this time not different after all?
And for reference, here is Goldman's take:
€63 put-back falls short of expectations
Today (February 22) at 11:00 GMT, the ECB announced the LTRO funds to be returned next week through the (fifth) weekly put-back option, and the first for the LTRO-2.
Banks repaid €63 bn of LTRO funds (LTRO-2: €61 bn and LTRO-1 €2 bn); this falls well short of expectations (e.g. FT reported a consensus of €130 bn) and the initial repayment of LTRO-1.
The cumulative repayment now stands at €212 bn (21% of initial take-up), leaving the LTRO cash in the system at €807 bn.
Weekly put-back tempo of <€5 bn base case
Banks used the initial repayment option to send a ‘health signal’ and repaid €137 bn of LTRO-1. The initial repayment of LTRO-2 was “only” €61 bn.
Our expectation is for the repayment tempo to stabilize in future and we see a ‘repayment corridor’ of €0-5 bn per week as a base case expectation. This allow banks to gradually reduce the use of term ECB funds as we move through 2013.
Signaling and maturity are crucial
Without time pressure, a put-back 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.