In late June, European banks are due to repay €478 billion in loans—equivalent to about $525 billion—to the European Central Bank (ECB).
The loans, which carried virtually no interest, were made by the ECB to ensure that banks kept lending during the COVID War so European economies would continue to function.
Some loans were given at -1.0-percent interest rates, meaning the ECB was paying banks to keep lending.
Since 2014, the ECB has doled out more than €2 trillion, of which about €1.1 trillion must be repaid before 2025.
The repayment is one step in the ECB’s withdrawal of support for banks across the 19-nation European Union (EU), which could tighten banks’ liquidity by $1.2 trillion, The Wall Street Journal reported.
The support program, called “targeted longer-term refinancing operations” (TLTROs), has been in place since 2011 and began as the continent struggled to recover from the Great Recession.
Ending the supports could squeeze the region’s more fragile banks and even some national economies, EU regulators and the International Monetary Fund (IMF) have warned.
“Banks in some southern European countries that continue to rely heavily on short-term TLTROs tend to be the same ones that do not have enough excess liquidity to repay” what they owe the ECB, the IMF said in a statement.
Europe’s banks will replace the absent ECB funds by borrowing around €150 billion this year, Goldman Sachs analysts have calculated.
The banks also may need to sell government bonds to raise cash, a move likely to push interest rates higher, Goldman said.
“Banks have been getting liquidity support from the ECB since 2011,” Corinne Cunningham, chief credit researcher at Autonomous, a division of Alliance-Bernstein, told the WSJ.
“It’s been a really long time to now switch and expect them to fund themselves entirely independently,” she said.
Italian banks in particular are under watch: they account for 30 percent of TLTROs still needing to be repaid. In February, they owed the ECB €328 billion but had only €245 billion in available reserves, according to data from Société Générale.
TREND FORECAST: Banks unable to repay their ECB loans will be extended special terms, extensions, or other perks that will keep them from floundering; thus, the ECB will remain in the bailout business under other names for the foreseeable future.