LTRO Repayment Enthusiasm Evaporates

The bangish enthusiasm that European banks launched off LTRO repayment season, when on January 25 some 278 banks repaid a grand total of €137.2 billion in LTRO funds, has dried down to a whimper, and as reported earlier today, the ECB announced that just 9 banks opted into the latest weekly putback of excess ECB capital. This is the lowest weekly number of participants since the LTRO repayment window was opened, and may indicate that European banks are starting to get seller's remorse about parting with Draghi's money a little too fast in a desperate attempt to telegraph an all clear when it comes to their balance sheet and funding needs.

But while today's action was to be expected, it is next week that everyone will focus on. As Goldman explains: "Next week we expect a large put-back. Banks have the option to begin putting back LTRO-2 funds allocation on February 27; the announcement of intent to repay is due on February 22. We see this as the date of a larger put-back amount, as the banks in the core – which have opted for full repayment of LTRO-1 – get the opportunity to repay the LTRO funds in full."

And now that the bogey is out there, any repayment that is less than spectacular, or if the number of participants is lower than expected, and suddenly the concern that European banks are once again hoarding cash "for whatever reason" will be back on the table right and center.

More from Goldman:

€3.8 bn in the fourth put-back, €875 bn left

 

Today (February 15) at 11:00 GMT, the ECB announced the LTRO funds returned to it through the (fourth) weekly put-back option.

Banks repaid €3.8 bn, bringing the cumulative repayment to €149 bn or 15% of the initial take-up.  The cumulative amount of LTRO cash left in the system now stands at €875 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. Over the past three weeks, the repayment tempo has stabilised, and we see a “repayment corridor” of €0-5 bn per week as a base case expectation.

 

Next week: We expect a large put-back

 

Banks have the option to begin putting back LTRO-2 funds allocation on February 27; the announcement of intent to repay is due on February 22. We see this as the date of a larger put-back amount, as the banks in the core – which have opted for full repayment of LTRO-1 – get the opportunity to repay the LTRO funds in full.

 

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.

In short: €3.8 billion this week, €875 billion left.