The first of the eurozone’s banks stepped forward on Friday to make 137.2 billion euros (US$183 billion) in early repayments on the cheap, three-year emergency loans they received from the European Central Bank (ECB).
The ECB launched the unprecedented 1 trillion euro (US$1.3 trillion) loan operation in two tranches at the end of 2011 and again in February last year, in an attempt to relieve stress on banks at the height of the euro debt crisis.
The central bank’s aim was to ensure lenders had enough funding to do business so the flow of credit to the wider economy was not squeezed. The loans have been credited with easing the crisis by tackling fears that one or more of its shaky banks might fail.
When the program was launched, banks were given the option to pay back the loans early, with the repayment window opening at the end of this month. Analysts have been eager to see how many banks will join the scheme, as this would reflect if parts of the eurozone’s financial system are returning to health.
The ECB on Friday said that 278 lenders will make early repayments on Wednesday. Economists’ forecasts for repayments had ranged between 100 billion euros and 200 billion euros. In keeping with its usual practice, the ECB identified neither the lenders involved nor the countries they come from.
As well as helping banks, the loans also gave indirect relief to heavily indebted countries, like Spain and Italy, which were facing high borrowing costs in bond markets.
Flush with cheap credit from the ECB, banks started buying government debt. That raised bond prices and lowered bond interest rates, which equates to lower borrowing costs for the struggling countries.
The ECB lent 489 billion euros to 523 banks in December 2011 at what was then its current interest rate of 1 percent, and another 529.5 billion euros to 800 banks at the end of February last year.
The ECB’s benchmark interest rate was since lowered to 0.75 percent, meaning banks can get short-term funding from the central bank at an even cheaper rate.