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Banks' Second ECB LTRO Repayment Seen Below Forecast


Eurozone banks are set to repay lower than forecast amount they had borrowed at the second round of the three-year loans extended by the European Central Bank last year. However, the repayment would come in much ahead of the due date.

The ECB announced on Friday that 356 banks will make a repayment of EUR 61.09 billion on February 27, the first day the pre-payment could be made. The figure was below the EUR 130 billion expected by analysts.

The central bank had given EUR 529.53 billion three-year loans to 800 banks on February 29 last year under a facility known as long-term refinancing operations or LTROs.

The bank had carried out the first LTRO in December 2011 and a second one in February 2012, giving out more than EUR 1 trillion in total, in a bid to avert a credit crunch as the euro area sovereign debt crisis unfolded.

A total 523 banks took EUR 489 billion in three-year loans in the first round of LTROs in December 2011. The central bank also said today that nine banks will repay EUR 1.70 billion of the first LTRO loans at the fifth repayment opportunity.

Banks started early repayment of the first LTRO loans in January with the initial amount of EUR 137.2 billion exceeding analysts' expectations. Thus far, a total EUR 151.2 billion of the first tranche of LTROs has been repaid.

The latest repayments will take the total amount returned under the two LTROs to EUR 212.3 billion. Markets view the repayments as signs of strength of Europe's recovery.

With the latest figure coming in below forecast, the euro took a hit in Friday's trade. In an immediate response to the ECB announcement, the currency plunged to a six-week low of 1.3157 against the U.S. dollar.

ECB President Mario Draghi said on February 7 that LTRO repayments "reflects the improvement in financial market confidence". He urged banks to appropriately assess their funding situation, their ability to provide new loans to the economy and their resilience to shocks, while deciding on the repayment amount.

"We will closely monitor conditions in the money market and their potential impact on the stance of monetary policy," Draghi said.

The lower-than-expected repayment of the second LTRO suggest euro area banks may be still reliant on ECB funds, analysts said. This also reflects market caution ahead of the crucial elections in Cyprus and Italy.

by RTTNews Staff Writer

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