Eurozone banks to repay another 447b euros of central bank loans early

EUROZONE banks will repay another 447.5 billion euros (S$637.8 billion) in multi-year loans from the European Central Bank (ECB) next week, marking another step in reducing the central bank’s oversized balance sheet.

The ECB said on Friday (Dec 9) that this will be another early repayment after it jacked up borrowing costs in hopes that banks would rather hand back the funds than pay the extra interest. Following the higher borrowing costs, eurozone banks repaid 296 billion euros last month.

The early repayments are part of the ECB’s efforts to tighten financing conditions, temper demand and ease inflation, which hit a record-high 10.6 per cent in October.

Until recently, banks had been sitting on 2.1 trillion euros of cash from the ECB. The funds came from the central bank’s Targeted Longer-Term Refinancing Operations, which were launched to encourage lending and spur economic activity when deflation threatened the eurozone.

At 8.5 trillion euros, the ECB’s balance sheet remains exceptionally large by historical standards, and the bank is expected to outline plans next week on reducing it further.

The next step would be to let some of its debt – which amounts to 5 trillion euros – expire, but this process would likely be gradual with a small initial reduction.

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Analysts polled by Reuters saw the bond holdings shrinking by only 175 billion euros next year. REUTERS