LTRO repayments have European economists concerned about too much cash in the system. With more than half of the banks which borrowed money in the first LTRO program expected to pay their loans back next week, a ripple effect is occurring in the European economy. The euro is at a 10-week high against the dollar, and interest rates in the futures market are rising, while two-year bonds and some future contracts are falling.
LTRO payments, or longer-term refinancing operations payments, to the European Central Bank started once again this week, and it’s causing a ripple effect throughout the economies of Europe. This week banks were given the go-ahead to repay over $1.33 trillion of three-year loans they borrowed in 2012 in two sections.
The only banks which can participate in the LTRO payments at this time are those which can raise funds at less than 75 basis points. The European Central Bank said 278 banks, which took loans in the first of the two LTRO programs, plan to repay their loans next week, about two years before they are due. That’s more than half of the 523 banks which borrowed through the first LTRO program.
Bloomberg spoke with one strategist who believes most of the LTRO payments are going to come from northern Europe because the benefit they received from the LTRO is at an end. He pointed out that if the LTRO repayments are only from core banks, then it indicates that Europe is still a two-tiered zone. This shows that the European economy is still facing a lot of tension.
The 2011 and 2012 LTRO programs were designed to prevent the euro from falling apart, and the cash did help prevent problems in Italian and Spanish bonds. At this point the possibility that money will start going back to the European Central Bank is pushing up interest rates in the market. However, The Wall Street Journal reports that in Germany, two-year bonds and future contracts tied to money market rates have fallen significantly. The concern is that extra money in the system will decline.
Today, the euro was at its highest level versus the dollar in 10 weeks.