Data brightens prospects for German, eurozone recovery

The eurozone may finally be emerging from its crisis, data showed Friday, with banks rushing to repay emergency funding and confidence in Germany on a seemingly unstoppable upwards trajectory. The embattled euro ended the week on a high note, rising to well above $1.34 after the European Central Bank said the region's banks are starting to pay back ahead of time loans taken out a year ago to avert a looming credit crunch in the single currency area. ECB chief Mario Draghi, speaking at the World Economic Forum in Davos, hailed what he saw as the new-found tranquility on the financial markets and said "all the indices point to a substantial improvement of financial conditions." And in Germany, Europe's biggest economy, both business and investor confidence are on the rise. A year ago, the ECB pumped more than 1.0 trillion euros ($1.3 trillion) into the banking sector to bring it back from a dangerous credit crunch that could have pushed the entire single currency area down into the abyss. At the time, the ultra-cheap three-year loans -- known as long-term refinancing operations or LTROs -- were credited with marking a turning point in market sentiment towards the embattled euro. The LTROs were launched in two batches, in December 2011 and February 2012, and both included provisions to allow early repayment after one year, with the first repayment window opening on January 30, and the second on February 27. After that, repayments can continue on a weekly basis, depending on demand. In a widely-watched announcement on Friday, the ECB said that 278 banks would repay 137.16 billion euros of the first 489-billion-euro LTRO on January 30. That is much more than the 100 billion euros expected by analysts. The magnitude of the repayments is a sign of the improved health of the financial markets as it suggests banks are enjoying better access to funding, experts say. "It is no wonder that the euro exchange rate is going up. We see the voluntary return of excess liquidity to the ECB as a strong vote of confidence in the euro," said Berenberg Bank economist Holger Schmieding. "It is almost too good to be true. Europe is starting to bounce back," he said. A raft of positive sentiment data this week certainly appears to back up this view. The Purchasing Managers' Index or PMI -- a gauge of private business activity across the eurozone -- hit a 10-month high in January, although it still suggests further contraction. And in Germany, the region's top economy, both business and investor confidence is rising sharply. The PMI for Germany alone notched up its strongest increase in a year. And just days after the ZEW think tank said its monthly investor confidence index soared to the highest levels since the start of the eurozone debt crisis in 2010, the Ifo institute said its business sentiment barometer, too, is now at a seven-month high. "The recent surveys add to growing signs that the German economy is turning a corner after a sharp contraction at the end of last year, and a strong rebound should be underway," said Barclays Research analyst Thomas Harjes. According to the latest official gross domestic product (GDP) data, the German economy contracted by around 0.5 percent in the fourth quarter of last year, meaning that the country turned in its weakest growth in four years. But there is growing consensus that the dip in growth will prove short lived. And with Germany firmly back on the growth path, that will benefit the entire euro area, analysts say. The Ifo data "signal that the German economy has returned to growth," said Commerzbank chief economist Joerg Kraemer. Kraemer attributed the turnaround to the ECB's anti-crisis measures: in addition to the LTROs, the bank also unveiled a scheme to buy back the sovereign bonds of the most vulnerable countries. Nevertheless, analysts insist the eurozone is far from being out of the woods yet. Tensions could re-emerge if, for example, it transpires that only banks in the stronger core countries such as Germany are repaying the loans. Banks in still vulnerable, peripheral countries -- such as Spain and Italy -- could become "stigmatised" if they do not repay, analysts warned. The ECB did not provide any details on the 278 banks which have decided to repay the cash so far. ECB chief Draghi also warned that it was too early to declare the battle over. "I think to say the least, the jury is still out," he said.