Money markets ecb payback pushes markets into uncharted water

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* ECB to give initial LTRO repayment details on Friday at 1100GMT * Ample excess cash to remain in 2013, stabilising spot rates * Steeper money market curve seen as uncertainty hits forward rates By Emelia Sithole-Matarise and Marc Jones LONDON, Jan 24 Money markets are bracing for volatile trading in coming weeks which could lift short-term rates as banks start paying back the 1 trillion euros of ultra-cheap European Central Bank loans that have kept them afloat over the past year. The ECB will say on Friday how much of 490 million first tranche will be returned immediately by the 523 banks that took part in the first of its twin three-year funding handouts at the end of December 2011. Estimates of the payback total are averaging around 100 billion euros according to the latest Reuters poll, although some analysts believe it could be as high as 300 billion euros. That would roughly halve the amount of so-called "excess liquidity" sloshing around the system and has kept bank-to-bank lending rates pinned at record low levels for almost a year. Historically money market rates, which effectively underpin what banks charge firms and consumers for loans, only tend to move freely once excess cash drops below 200 billion but the lengthy repayment timeline has left them in uncharted water. Speculation about how much could be repaid early jolted money markets last week. Interbank lending rates hit their highest since July a senior ECB member brought them back down by saying he thought the amount would not be enough to have an impact. For banks, the desire to show shareholders, regulators and rating agencies that they are weaning themselves off central bank life support is a tempting reason to return the cash. Germany's Deutsche Bank and Commerzbank, France's BNP Paribas, Societe Generale, Credit Agricole, Spain's Santander, BBVA, Caixabank, Sabadell are all angling to pay back the money, while UK's HSBC, Lloyds, RBS and Barclays and Italy's Intesa Sanpaolo and Unicredit are also said to be thinking about it. But the desire to look good must also be weighed against the fact funding markets remain extremely fragile and for many in the demonised periphery are still far more costly than the ECB. While BNP Paribas may only pay 1.2 percent for a 2-1/2 year loan at the moment, a struggling Spanish or Italian bank has to pay far more, making it near impossible to give up the ECB cash. "The case for not paying back is not really big enough for many core banks," said RBC Capital markets analyst Carlo Mareels. "It is a different story for many periphery banks. Maybe their shareholders would rather they kept the money and did something with it." FRONT LOADED, BACK END IMPACTED As with last week's move, money market pricing is likely to be most pronounced in Eonia forward contracts which lock in an overnight borrowing rate over a longer period. Analysts think a large repayment would see one-year rates , currently at 0.15 basis points, quickly bump back up to the 0.22 percent they hit last Thursday when speculation of a big return was growing. Spot rates are expected to remain at their ultra low levels, however, given the belief there will still be enough cash in the system through 2013 to keep them anchored near the ECB's zero deposit rate which acts as a floor for the market. "The market is working on the assumption that liquidity is going to reduce significantly over time, so forward rates are going to be under pressure because of the uncertainty over how much it will be reduced by in a year or so," a trader said.PERIPHERY PRESSURE Euribor futures , which price in expectations of where the market expects interbank rates to be in future, were also seen kicking higher especially for the 2014/2015 strip. As banks get back the government bonds and other collateral they used to borrow from the ECB, the lending markets for those assets could also be affected. While much of the focus will be on the ability of banks from the euro zone's troubled peripheral countries to repay the funds, the initial repayment may be largely influenced by the northern European banks that dominated the first LTRO. Data on who took the cash is not released by the ECB, but combing national central bank data shows over the two handouts Spanish and Italian banks took the lion's share at around 175 billion and 130 billion euros respectively. And digging even deeper shows French and German banks took a more significant share of the first round at 44 and 30 billion euros - not quite as much as the 55 billion taken by Italian banks but more than Spanish banks' 25 billion. With those bank more able to make repayments, it means Friday's figures may provide more of a big bang than the ones from the second LTRO which will be published on Feb. 22. Once repayments are allowed, banks can pay the ECB back as much or as little as they want every week until the end of January 2015 for the first LTRO, February 2015 for the second.