Banks slow crisis money repayment to ECB

An illuminated euro sign is seen in front of the headquarters of the European Central Bank in Frankfurt

An illuminated euro sign is seen in front of the headquarters of the European Central Bank (ECB) in the late evening in Frankfurt January 8, 2013. REUTERS/Kai Pfaffenbach

updated 2/1/2013 6:14:27 AM ET

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FRANKFURT (Reuters) - Banks will pay back another 3.5 billion euros next week of the emergency 3-year loans they took from the European Central Bank a year ago, further deflating the ECB's balance sheet after they paid back a whopping 137 billion euros this week.

The repayments, which the ECB said would be made by 27 banks, compared to a prediction of 20 billion euros from a Reuters poll of traders, although forecasts had varied widely from zero to 150 billion euros.

The early return of some of the 3-year funds the ECB pumped into the system in late 2011 and early 2012 to avert a credit crunch marks the beginning of an unwinding of the ECB's crisis measures - the opposite of action being taken by other central banks.

The ECB's balance sheet is likely to have shrunk to around 2.8 trillion euros as a result, the lowest level since February 2012 just before the second 3-year loan offering.

Overall the excess of euros washing round the euro zone's banking system has fallen sharply, and the euro has risen against major currencies in response.

Earlier on Friday it hit a 14-month high against the dollar and its highest level versus the yen since April 2010.

All this taken into account effectively acts as a tightening of monetary conditions at a time when the euro zone economy is showing its first feeble signs of stabilizing. That has prompted some economists to muse about the chances of a cut in official ECB interest rates to offset any damage to growth prospects.

"Monetary conditions are likely to be a major concern at the ECB, and by that irony the ECB may be closer to a rate cut now than in December and January," Nordea economist Anders Svendsen wrote in a note ahead of the announcement of the loan repayments on Friday, though this was not yet his baseline scenario.

The ECB is set to discuss interest rates at its next Governing Council meeting on Thursday and has been widely expected to leave rates at a record low of 0.75 percent.

Banks took more than 1 trillion euros in total in the two offerings of 3-year loans in December 2011 and February 2012. They can begin to repay funds early on a weekly basis from January 30 for the first tranche and from February 27 for the second.

(Reporting by Eva Kuehnen)