On 30 January, the banks will get their first opportunity to repay the EUR489bn borrowed in the 3Y LTRO in December 2011. The second LTRO, amounting to EUR521bn, can be repaid from 27 February. As a result, excess liquidity will decline.
The interest rate on the 3Y LTRO might be unattractive for some strong core country banks, which are expected to return a large share of their 3Y LTRO loans at the first opportunity. Meanwhile most banks in periphery countries will tend not to repay.
We expect the first repayment will be around EUR75-100bn. We expect around EUR200bn to be repaid over the coming months but this estimate is highly uncertain.
Ramifications
Historical evidence suggests that declining excess liquidity has almost no impact on the EONIA fixing when excess liquidity is above EUR650bn. In fact, there is no real evidence that the EONIA fixing should move above 15bp before excess liquidity declines toward EUR200bn, i.e. when EUR450bn of the LTRO money is repaid.
The current EONIA forward curve suggests that the EONIA fixing will hover around 15bp by the June reserve maintenance period, implying a decline of excess liquidity of up to EUR450bn over the next five months. In our view, this is aggressive.
To Read the Entire Report Please Click on the pdf File Below.
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EUR Strategy: Aggressive Pricing From LTRO Repayment
Published 01/22/2013, 04:00 PM
Updated 05/14/2017, 06:45 AM
EUR Strategy: Aggressive Pricing From LTRO Repayment
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