Euro Dives On Jitters About European Bank Loan Repayments

The euro fell sharply against the dollar around 7:45 AM. The move is being connected with comments made by ECB Executive Board Member Benoît Cœuré around the same time about LTRO repayments.

There's been chatter about European banks possibly beginning to repay loans early to the ECB from the central bank's LTROs (long-term refinancing operations) initiated in 2011. The loans were offered to troubled eurozone banks to boost liquidity in the banking system.

Early repayments of the loans would likely put upward pressure on interbank borrowing rates, because banks would have to turn elsewhere for short-term funding.

Bloomberg's Katie Linsell explains:

Banks can soon start repaying about 1 trillion euros ($1.3 trillion) of cheap loans that the ECB provided under its longer- term refinancing operations to avert a credit crunch. Concern the Frankfurt-based central bank will tighten its collateral rules also helped push indicators of future interbank borrowing costs higher.

“The repayment of the LTRO money has the potential to throw key market trends into reverse,” Christoph Rieger, head of fixed-rate strategy at Commerzbank AG in Frankfurt, wrote in a note. “Reportedly the ECB is mulling plans to restrict loan collateral. This would add to the pressure on peripheral banks to reduce ECB funding,” though only marginally, he wrote.

Cœuré just said that he doesn't expect LTRO repayments to have any impact on EONIA, one of two main interbank borrowing rates used in the eurozone.

However, with those borrowing rates rising in recent days, perhaps on expectations that early repayments would affect impact EONIA, the euro has rallied as well. Thus, Cœuré's comments may have sparked the selloff.

The euro fell from around 1.3270 to 1.3195 after Cœuré's comments, but it's since rebounded a bit: