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ECB reduces its balance sheet by a massive 800 billion euros

Eurozone banks are paying back loans totaling almost 800 billion euros to the ECB in a rush. This is because the ECB urgently needs to reduce its balance sheet.

Already in November, the banks of the euro zone had returned targeted long-term loans in the amount of 296.29 billion euros to the European Central Bank ahead of schedule. These loans, known in the trade as "TLTRO III," were very lucrative for the banks. The ECB thus pursued the declared goal of providing banks with sufficient liquidity during the Corona crisis. This was avowedly intended to boost lending to the real economy.

Never before had the ECB pulled so much money out of the banking system in one fell swoop. But as the central bank announced on Friday, eurozone banks will now repay another 447.5 billion euros in TLTRO III loans to the ECB ahead of schedule. A further 52 billion euros will fall due in December. This reduces the total amount of outstanding refinancing operations by almost 800 billion euros within just a few weeks.

Until recently, eurozone banks were sitting on €2.113 trillion in TLRTO cash. And TLTRO funds outstanding will still total 1.32 trillion after repayment in December, much of which matures next June, Reuters reports. But the drop of almost 800 billion euros within a few weeks is quite enormous.

The background is that is inflation reached a record 10.6 percent in October. Therefore, the ECB has significantly increased the borrowing costs for TLTRO loans in November. In doing so, it wants to cause banks to return the funds rather than pay the higher interest rates. The early repayments are expected to raise banks' funding costs and dampen demand for credit, which in turn is expected to dampen inflation.

At 8.5 trillion euros, the ECB's balance sheet is still exceptionally large by historical standards, and the bank is expected to unveil plans next week to reduce it further. As a next step, it could phase out some of the €5 trillion of debt it holds. But that process is likely to be gradual, and the reduction is likely to be small at first.

Analysts polled by Reuters expect bond holdings to shrink by only 175 billion euros next year. Central bankers face the problem of tightening monetary policy at precisely the time when the eurozone is heading for recession. In the survey, the analysts polled gave an average probability of 80 percent for a recession within a year.

@GESARAandNESARA

Source

https://www.reuters.com/markets/europe/euro-zone-banks-repay-another-447-bln-euros-ecb-loans-early-2022-12-09/

Reuters

Euro zone banks hand back another $472 bln of ECB cash

Euro zone banks are set to repay early another 447.5 billion euros ($472 billion) in multi-year loans from the European Central Bank, bringing the total reduction of outstanding loans to nearly 800 billion euros in just a few weeks, the ECB said on Friday.

957 viewsJenny B, 12:25