"Strong" repayment of ECB cheap funding Banks across Europe pledged to repay more than a quarter of the first tranche of cheap funding they took from the European Central Bank at the height of the debt crisis, the central bank said on Friday, in a further sign of a gradual improvement in the eurozone's financial system. The two so-called longer-term refinancing operations were greeted as a decisive step in restoring confidence in the eurozone's financial system and ultimately led to the ECB pumping over €1tn into about 800 banks. The first possible repayment date is January 30 for funds lent in the first LTRO tranche of €489bn, and the ECB said 278 banks would repay €137bn on that date. It did not name the banks repaying the loans or give their home countries. "There is much lower tension in the markets, so there is less need of a cushion," said one banker, explaining why many banks were taking the opportunity to repay. The amount being repaid, which beat many forecasts, was seen as a positive sign. "The strong LTRO repayment is a strong signal of the rehabilitation of many European banks," said Huw van Steenis, analyst at Morgan Stanley. But the repayments also threaten to lay bare once again the financial fragmentation across the eurozone, where banks and companies in northern countries not directly hit by the crisis enjoy cheap financing and easy liquidity while those in the crisis-hit south still struggle. The LTRO money, which costs 0.75 per cent in interest, is on the one hand cheap, but on the other hand an inefficient use of funds for, primarily, northern banks with plenty of other sources of liquidity that had been parking surplus funds on deposit at the ECB for 0 per cent. The banks themselves have disclosed varying amounts of information about their repayment strategies. Some analysts noted that some banks in southern Europe could be tempted to pay back symbolic amounts of the LTRO money so as to avoid appearing weak in comparison to their rivals. "Maybe there will be banks that will try to look better by paying back at least a small part of the money early, and also to reflect their improved liquidity position in comparison to last year," said Daragh Quinn, a Spanish banking analyst at Nomura. In Spain, BBVA and Banco Popular, Banco Sabadell and Bankinter plan to pay back some LTRO money. Senior bankers have noted that the opportunity to repay early risks stigmatising banks who do not do so, heaping pressure on those lenders who still need the cheap funding to at least start their repayments. Italy's Intesa Sanpaolo, which at €36bn was the largest single taker of LTRO money, will not start repaying yet. BNP Paribas and Deutsche Bank will start repaying the money they borrowed but also plan to retain some money as an "insurance policy" against renewed interbank tensions, according to senior bankers. Deutsche only took money in the second LTRO so cannot start repaying until February 27. Germany's Commerzbank, which took €10bn in the first LTRO tranche, has said it intends to repay the money in the first quarter but would not confirm whether it was repaying on January 30. France's Société Générale plans a similar move and KBC, the Belgian financial group, said on Friday it would pay back €8.3bn in the first quarter. Lloyds Banking Group, which tapped the ECB for €13.5bn to finance its business in Ireland, Belgium and the Netherlands, will repay three-quarters of the money when the repayment window for those who drew on the second tranche of funding opens. Royal Bank of Scotland, which drew down €10bn under the scheme, will also start making repayments in the coming weeks, according to a person with knowledge of the situation. "[Friday's announcement is] on the higher side of estimates and we believe this will be interpreted positively," said Lyn Graham-Taylor, fixed-income strategist at Rabobank. Following the ECB announcement, Germany's two-year bonds rose 8 basis point to 0.26 per cent, the highest since March last year. Benchmark 10-year bonds were up 7bp at 1.64 per cent. Reporting by Michael Steen and James Wilson in Frankfurt, Mary Watkins and Jennifer Thompson in London, Patrick Jenkins in Davos, Scheherazade Daneshkhu in Paris and Miles Johnson in Madrid