Improving Health Banks Wean Themselves from ECB Support

European banks are planning to pay back cheap loans provided by the European Central Bank ahead of schedule, at the end of January. The move suggests that Europe's financial sector is slowly recovering.

The European Central Bank in Frankfurt announced that banks would pay back euro crisis loans early.

The European Central Bank in Frankfurt announced that banks would pay back euro crisis loans early.

In a further sign that the euro crisis is slowly starting to abate, 278 European banks said Friday they would repay the European Central Bank €137 billion ($184 billion) in emergency three-year low cost loans provided just a year ago. The earlier-than-expected repayment shows that at least some of Europe's commercial banks are slowly weaning themselves off of indirect state support and are returning to health.

For the ECB, it's the first step in a gradual unwinding of unprecedented measuresthat had been in place over the last two years in order relieve pressure on banks during the euro crisis. The ECB has issued banks more than €1 trillion euro in cheap loans in two long-term refinancing operations (LTFOs), one in December 2011 and the second in February 2012.

The ultra-cheap lending measures were designed to prop up shaky banks and avoid a credit crunch as the debt crisis sputtered on and interbank lending dried up. The money indirectly went to crisis affected countries because many banks used the cash to buy up government bonds of countries like Spain and Italy.

At the time, banks were given the option of paying back the ECB two years early. Analysts had been watching to see how much banks paid back in order to gauge the extent of the euro-zone recovery. A Reuters poll on Monday suggested banks would return around €100 billion from the first LTFO. The higher sum announced on Friday gave a boost to the euro as well. A total of 523 banks had participated in the first LTFO in 2011.

Some institutions, like Germany's Commerzbank and Britain's Lloyds, have announced that they will initially pay back only a part of the money they have been lent. The financial institutions are taking advantage of the option to pay the money back after a year because, with the crisis appearing to diminish, an increasing number of banks are finding alternative and cheaper ways of securing liquidity than the ECB.

Although the situation has improved considerably for financial institutions in the currency union's core countries, it is still nearly impossible for Greek banks, for example, to raise money from the markets. Generally, though, the situation has grown far less tense on the markets since ECB President Mario Draghi declared in July that the central bank was prepared to use any means at its disposal to defend the euro and the euro zone.

rr- with wire reports


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