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ECB pulls up to €300 billion out of the eurozone

The money will come from banks in the eurozone as part of the repayment of a long-standing loan. This is an effort to fight inflation.

According to the ECB, banks in the eurozone are due to repay nearly €300 billion to the ECB on Wednesday. This is the biggest cash drain from the eurozone financial system in the 22-year history of the euro.

The repayments will come as part of a €2.1 trillion multi-year loan taken out by banks under its targeted long-term refinancing operations (TLTROs)

Why does the ECB require this?

It is part of the ECB’s efforts to fight record-high inflation in the eurozone. In addition to raising the cost of borrowing, it is the ECB’s first step towards draining even more liquidity next year by reducing its multi-trillion-euro bond portfolio.

At first glance, this may also appear to be a kind of test of how the current economy will react to such capital outflows. Depending on the market’s reaction, it then remains to be seen how quickly the ECB can proceed with the withdrawal of the €3.3 trillion asset purchase program that will be discussed on 15 December.

ECB Executive Board member Isabel Schnabel commented on the situation on her Twitter account.

The possibility of repayments is in 2 dates

However, Wednesday 23 November is only the first date when banks can resort to this voluntary repayment. Although the ECB recommends not to delaying the repayment too long, banks can opt for a later date.

The second deadline will be 21 December, when an even larger repayment is expected. The reason is simple, banks will want to have an overview of their balance sheet ahead of the year-end results, so they will wait to make a larger repayment.

Read also: Stock indices may drop again soon – here’s why

Another area of focus for the ECB is money markets, where banks lend to each other for short periods. These markets have been hampered by ECB policy for years because banks could not find high-quality bonds to use as collateral for loans, or even had no incentive to do so when they could simply use TLTROs for subsidized loans.

Bruno is an Investment enthusiast with several years of experience in the industry. He enjoys following the latest news and technology trends...

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