Britain's safe-haven status was dealt a severe blow yesterday as the eurozone's beleaguered banks showed signs of recovery and the pound sank on dire growth figures.
The European Central Bank pumped more than €1 trillion (£843bn) into the region's banking system in December 2011 and March last year to avert a credit crunch, as fears of a full-scale bailout for Spain and Italy shook markets. The unprecedented long-term refinancing operations offered the funds to more than 500 banks at rock-bottom rates for three years.
But yesterday the ECB revealed that 287 banks have opted to pay back €137bn of the €489bn handed out in the first of the LTROs as soon as next week, in one of the clearest signs yet that the funding pressures on the eurozone banking system are beginning to ease.
Mario Draghi, the ECB's president, also bought time for the eurozone last summer when he promised to do "whatever it takes" to prop up the euro, including intervening directly to buy up the debt of member states if they request aid.
Analysts had expected the banks to repay around €100bn. Michael Symonds, at Daiwa Capital Markets Europe, said: "This is more than we had expected, and underlines the material improvement in funding conditions for most European banks in the past 12 months and, in particular, since the ECB also extended its backing to euro area sovereigns last summer."
Jurgen Michels, European economist at Citigroup, added: "The high figure of the repayment today suggests that in addition to core country banks, with excess liquidity, also banks from periphery countries used the repayment option, probably partly in order to demonstrate to the market that they are in a healthier position."
The positive signs sent the pound sinking to its lowest level for more than a year against the euro, hitting a low of €1.1714 at one point before recovering slightly. The single currency also roared to an 11-month high against the dollar.
Sterling briefly fell to a five-month low against the dollar as a dire 0.3 per cent decline for the UK economy in the final three months of 2012 spooked investors and raised expectations of further quantitative easing from the Bank of England's rate-setters.
Glenn Uniacke, head of options at the foreign exchange specialist Moneycorp, said the pound was being "slaughtered". "The tanking pound is curiously at odds with the soaring stock market, but that will be of little comfort to struggling importers."
Simon Derrick, chief currency strategist at BNY Mellon, added: "Weak GDP is one of a number of pressures on sterling. There's also the potential loss of the AAA rating and the improving picture in the eurozone, which is lessening its safe-haven attraction."
Data showing German business morale improving for the third month in a row in January – adding to signs that growth in Europe's economic engine room is picking up – also fanned demand for the euro.
Investors also sold out of a host of other safe-haven assets such as German and French sovereign debt yesterday as traders took on more appetite for risk. Italy and Spain's cost of borrowing fell to 4.1 per cent and 5.1 per cent respectively, far below the unsustainable 7 per cent seen at the height of the market panic last year.