Next week the European Central Bank (ECB) will be the first of the world’s major central banks to start winding down its unprecedented monetary easing programs. These programs have led to record low interest rates worldwide, and we’ve written extensively on the sometimes peculiar effects of these low rates. But the ECB will become the first to actually reverse this program starting next week.
As credit conditions contracted sharply at the end of 2011, the ECB pumped money into the system through two long-term refinancing operations (LTROs), which encouraged banks to lend to one another again. It also encouraged them to buy the debts of Italy and Spain. The LTROs offered banks the chance to hang onto the cash for a full three years, but only forced them to accept the funds for a year. The LTROs served as massive non-traditional monetary easing; after all was said and done, the ECB ended up injecting a total of� €1.02 trillion ($1.36 trillion) into the money system through the banks? While the� Fed recently hinted� that it might start to stop purchasing assets this year, and� has occasionally done so before, it has never yet sold them off back into the market. But banks that� borrowed from the ECB in its first refinancing operation can choose to start repaying that money beginning Jan. 30, thus diminishing the liquidity in the system.� Danske Bank estimates that banks will return €75-100 billion ($100-$133 billion) at the first repayment date; Deutsche Bank estimates €100-200 billion. Thereafter, they can continue to pay every week (see chart below).
The ECB will become the first major central bank to reduce its balance sheet? via .