Negative Rates in Europe

[astonas]

ECB’s Praet to recommend cutting main rate to 0.15 pct, says ‘Spiegel’ magazine

The bank also wants to introduce a negative rate on bank deposits for the first time

European Central Bank (ECB) executive board member Peter Praet will recommend the bank cut its main refinancing rate to a record low of 0.15 per cent from 0.25 per cent at its next policy meeting on June 5th, according to German magazine Der Spiegel.

The bank also wants to introduce a negative rate on bank deposits for the first time of -0.1 per cent as recommended by Praet, it was reported.

Praet holds the economics portfolio on the ECB’s executive board and routinely makes a presentation and policy recommendation at the beginning of governing council meetings which then forms the basis for discussion.

The ECB’s deposit rate is at zero at the moment and cutting it lower would mean effectively charging banks to park their money at the ECB overnight, which might be an incentive for them to lend the money out instead. The ECB was not available for comment.

Last week Reuters reported that the ECB was preparing a package of policy options for its June meeting, including cuts in all interest rates. Five people familiar with the measures being prepared outlined plans involving a potential rate cut, including the ECB’s deposit rate going negative for the first time.

http://www.irishtimes.com/business/e...zine-1.1800546


The cited Der Spiegel group's links are to be found here: (Not available in English, sorry. Spiegel has cut back on the number of articles translated for its international edition.)

http://www.manager-magazin.de/untern.../a-969354.html
http://www.spiegel.de/wirtschaft/soz...-a-969644.html
http://www.manager-magazin.de/politi...-a-969687.html

[mastergardener]

Re: Negative Rates in Europe

When you hear, "for the first time..", in any finance/economics article these days, isn't it a cue for further inspection?

Just a thought

[GRG55]

Re: Negative Rates in Europe

Second post this month, after a bit of an absence. Nice to have you back astonas!

Things in Europe starting to get interesting. The ECB continues to chisel away at Germany's objections to applying "unconventional policy" (or perhaps sometimes just ignoring those objections?). And there seems a reasonable possibility that German GDP growth will fall to zero by the end of this year the way things are heading right now. That might cause what remains of German resolve for universal austerity and reform to crumble, as it did the last time Germany found itself in this economic situation.

It is difficult to see capital coming into Europe; more likely to see it trickling out perhaps? Even the former safe haven of Switzerland is not longer the magnet for flight capital (hello Ukraine) it once was now that banking secrecy is compromised...Dubai and Singapore seeming to have taken the lead (along with top end London real estate) for that dubious prize.

What do you think happens next?

[Master Shake]

Re: Negative Rates in Europe

ECB’s Praet to recommend cutting main rate to 0.15 pct, says ‘Spiegel’ magazine

The bank also wants to introduce a negative rate on bank deposits for the first time


http://www.irishtimes.com/business/e...zine-1.1800546


The cited Der Spiegel group's links are to be found here: (Not available in English, sorry. Spiegel has cut back on the number of articles translated for its international edition.)

http://www.manager-magazin.de/untern.../a-969354.html
http://www.spiegel.de/wirtschaft/soz...-a-969644.html
http://www.manager-magazin.de/politi...-a-969687.html

So, ceteris paribus, that would be bearish for the Euro, bullish for the USD, and bearish for gold.

[Fox]

Re: Negative Rates in Europe

The ECB’s deposit rate is at zero at the moment and cutting it lower would mean effectively charging banks to park their money at the ECB overnight, which might be an incentive for them to lend the money out instead. The ECB was not available for comment.

It might also encourage banks to park their money outside the Eurozone or in to commodities.

What makes me laugh about this is that European banks are so "loan shy" it's almost laughable. It's part of the culture. The fact that the ECB is even contemplating such lunacy shows just how desperate and clueless they really are.

I'd say short the Euro, but that requires you to one day buy it back. Best to just dump it out right. :P

[astonas]

Re: Negative Rates in Europe

Second post this month, after a bit of an absence. Nice to have you back astonas!

It's good to be back. Thanks for your interest!

Things in Europe starting to get interesting. The ECB continues to chisel away at Germany's objections to applying "unconventional policy" (or perhaps sometimes just ignoring those objections?). And there seems a reasonable possibility that German GDP growth will fall to zero by the end of this year the way things are heading right now. That might cause what remains of German resolve for universal austerity and reform to crumble, as it did the last time Germany found itself in this economic situation.

It is difficult to see capital coming into Europe; more likely to see it trickling out perhaps? Even the former safe haven of Switzerland is not longer the magnet for flight capital (hello Ukraine) it once was now that banking secrecy is compromised...Dubai and Singapore seeming to have taken the lead (along with top end London real estate) for that dubious prize.

What do you think happens next?

What one thinks happens next necessarily depends on how one sees the motivations involved. Despite all protestations to the contrary, I see the ECB at this point as a quite political institution. Thus I interpret the negative interest rates for banks (particularly the timing of the announcements) as essentially a show of "get tough on banks" before the European elections on the 25th, and more broadly, before the Brexit referendum in 2015.

Now that France has apparently surrendered to Germany in the struggle for determining the monetary philosophy of Europe, the dominant question is whether the Anglo-Saxons in London will do so as well, or instead be successful in meaningfully influencing policy in Europe, and in the Eurozone. The last link in my OP was basically about how negative interest rates for banks in Scandinavia were highly successful in reigning banks in, without any of the disastrous repercussions on the broader economy (that bankers had warned of) coming true. Those are fighting words in the City of London, where it is axiomatic that what is good for banks is also good for the people. The effective defeat of the Tobin tax has not diminished anti-bank sentiment in the Eurozone one bit, it just redirected the angle of attack, and negative rates for banks seems to be the momentary (more indirect) approach. We'll see if it sticks any better than the last. If it does with positive effect, it will be one more piece of evidence that the City's banks are not valid economic symbionts worthy of protection through EU negotiations, but rather parasitic vermin to be smothered by EU regulation.

There's no question that this move would also chip away at the more germanic idea of the Euro as a reserve currency, but I presume the thinking behind it is that once European policy is more solidly and permanently Erhardian, Euro demand will come roaring back. In the short term, however, it serves to deepen the divide between the UK and continental Europe on monetary philosophy, and thus symbolically stakes out a tougher negotiation stance on the question of giving in to Cameron on bank regulation.

Concerning a change in continental attitudes toward austerity, I really don't see that as either pertinent or likely. Austerity is less about how much money is spent than it is about who controls (lender or debtor) what that money is spent on. As such, it is a fiscal, rather than a monetary, dimension of the crisis, and so its connection to the ECB is less clear to me than you appear to imply. The Troika member that is most relevant to austerity is not the ECB, but rather the IMF. Austerity can, and probably will, remain in place regardless of interest rates, even negative ones. (The Bundesverfassungsgericht in Karlsruhe could theoretically still surprise us on this point, but at this moment it seems extraordinarily unlikely.)


Now, to end the exposition and finally return to your question of "what happens next?", I would say that a lot depends on whether this "negative rate" talk is just posturing and pandering for the European Parliamentary Elections, that is, whether it will actually happen after the elections have come and gone. If it sticks, I would read that as a small step toward nudging the UK toward the door, by underlining one of the main philosophical differences between the islands and the continent, at a time when that stance is understood to be rather inflammatory in Britain. Concomitantly, I would read Merkel's recent overtures to Cameron as more about softening the appearance of the stance, than about showing an actual change of position. When things fall apart, it's nice to have evidence that one tried to be accommodating, so one can blame the other guy for the mess.

When it comes to money flows, it is certainly true that some hot money might shy away from Europe for a time, as you and others are suggesting. It might even look for a while more like a flood than a trickle. It is unclear to me, however, whether such hot money is as valuable to an economy as the (opportunity and other) costs associated with attracting and keeping it. One has, after all, heard hot money characterized as not only perfidious, but actually directly harmful to the production-consumption economy.

The reform agenda, including austerity, is thus not about attracting more money, but more of the right money. It is understood that that in some cases that may also mean less overall. As you say, the Swiss banking sector may continue shrink, as may many other European banks. But is a shrinking FIRE sector really a bad thing for economic health, if that sector is to a large extent parasitic? Remember that the US population is growing, but many European populations are not. There is no imperative in Europe to grow at all times, and at all costs, to sustain employment. In that sense at least, Europe is the anti-China.

As Mark Twain said: "It's not the size of the dog in the fight, it's the size of the fight in the dog."

[charliebrown]

Re: Negative Rates in Europe

Being the man on the street, I don't understand how this works. If my bank says we are going to charge you to keep your money here, my money is gone within a week, with the exception of the liquidity I need to pay my monthly bills. Wouldn't you just ask for cash and keep it in your mattress, or safe deposit box?
Doesn't this start a bank run? I assume short rates on gvt debt would plummet as I suppose this is where most of the money would head. Or is this what they
are betting on?

[GRG55]

Re: Negative Rates in Europe

Being the man on the street, I don't understand how this works. If my bank says we are going to charge you to keep your money here, my money is gone within a week, with the exception of the liquidity I need to pay my monthly bills. Wouldn't you just ask for cash and keep it in your mattress, or safe deposit box?
Doesn't this start a bank run? I assume short rates on gvt debt would plummet as I suppose this is where most of the money would head. Or is this what they
are betting on?

The Swiss did this in the 1970s during a period of high demand for the Franc that resulted in a lot of foreign money inflows. Discouraging saving of funds is exactly the point of the exercise...

[Southernguy]

Re: Negative Rates in Europe

I find that the difference between real negative returns on money kept in banks now to nominal negative interest rates proposed is only psicological, not real. Why not keep it under the matress? it could be stolen, moreover, in the actual (at least in this part of the world) paranoia towards money laundering when you try to return it to the banking circle you have a lot of explaining to do. And I am not talking over speculation...

[charliebrown]

Re: Negative Rates in Europe

I find that the difference between real negative returns on money kept in banks now to nominal negative interest rates proposed is only psicological, not real.

That is a good point. It will still cause me to accelerate my bank deposit wind down. Right now I just can't find any safe return for cash.

[Slimprofits]

Re: Negative Rates in Europe

When you hear, "for the first time..", in any finance/economics article these days, isn't it a cue for further inspection? Just a thought

The ECB’s deposit rate is at zero at the moment and cutting it lower would mean effectively charging banks to park their money at the ECB overnight, which might be an incentive for them to lend the money out instead.

unintended consequences come to mind. Who the heck knows what the banks will do as a result. Multiple competing forces at work in the US, EU and UK. 1. The regulators (whose approach in the US, UK and EU just might be the wrong one) 2. The central bankers easing and toying with the interest rates. 3. The bankers themselves whose approach to "risk management" just might be the wrong one. 4. The households, some deleveraging, some leveraging up.

[don]

Re: Negative Rates in Europe

The Swiss did this in the 1970s during a period of high demand for the Franc that resulted in a lot of foreign money inflows. Discouraging saving of funds is exactly the point of the exercise...

A friend of mine's father was a financial officer with one of the major railroads during the Great Depression. He told me his Dad went around the country with a satchel of cash, looking for a bank to deposit it that wouldn't charge the railroad for the service.

[astonas]

Re: Negative Rates in Europe

Being the man on the street, I don't understand how this works. If my bank says we are going to charge you to keep your money here, my money is gone within a week, with the exception of the liquidity I need to pay my monthly bills. Wouldn't you just ask for cash and keep it in your mattress, or safe deposit box?
Doesn't this start a bank run? I assume short rates on gvt debt would plummet as I suppose this is where most of the money would head. Or is this what they
are betting on?

Sorry, I should have been more clear. The rate in question is the rate banks get for storing money at the central bank:

The ECB’s deposit rate is at zero at the moment and cutting it lower would mean effectively charging banks to park their money at the ECB overnight, which might be an incentive for them to lend the money out instead.

This makes it harder for banks to hold profitable zero-risk investments. Since the banks fully understand that a negative rate on demand deposits will trigger a run, this will not propagate to negative rates for retail customers. So it mostly serves to reduce an implicit subsidy being given to banks, and forces them to hold their cash on their own books overnight, or loan it to one another, instead of storing it at the central bank.

In contrast to Europe, the US continues to give away money to banks, by both giving them interest on central bank deposits, and lending money to them at near-zero rates. Essentially, a US bank can get arbitrarily large profits, simply by borrowing free money and then depositing it (risk-free) at the same central bank that lent it the money in the first place. It is this exploitation that is being closed in Europe, through the application of a negative deposit rate.

[mmr]

Re: Negative Rates in Europe

Another key difference is that the ECB is still a net "creditor" to banks (providing long-term loans, especially to peripheral banks) while the Fed is a net "debtor" (the money printed through QE eventually flows through the banking system and is deposited at the Fed).

As a result, the balances held at the ECB deposit facility are too small to really matter.

By way of comparison, European banks have recently been depositing less than €50 billion on average with the ECB overnight (and only €17 billion last week) while US banks are depositing $2.6 trillion with the Fed (and more every week thanks to QE).

For the ECB, charging negative rates on this small balance doesn't really make a difference - if anything, it would likely cause banks to withdraw their deposits from the ECB and buy "risk free" short-term government bonds, which could slightly push down sovereign borrowing costs.

[Adeptus]

Re: Negative Rates in Europe

Being the man on the street, I don't understand how this works. If my bank says we are going to charge you to keep your money here, my money is gone within a week, with the exception of the liquidity I need to pay my monthly bills. Wouldn't you just ask for cash and keep it in your mattress, or safe deposit box? Doesn't this start a bank run?

I had the exact same question in my mind. One thing is Central Banks inflating away people's savings. People just don't get inflation, but outright charging you to store your money (digitally) is something people will understand pretty quickly. In Canada, people are pissed off at the high monthly fees banks charge for having an account and even more fees for withdrawls, charging customers interest to hold their money would be the straw that broke the camel's back - at least here in Canada. FYI, there's some credit unions now offering free chequings accounts to counter the bank's greediness. People are moving their accounts to these credit unions.

Charging interest on accounts is like a slow bail-in process. In 2008, we had a temporary panic when FDIC-like insurers in certain countries (Canada included) would not cover savings over X amount. Capital flight ensued en mass for a couple of months, until governments came to their senses and double, tripled or even guaranteed 100% of savings in accts. Charging interest is different of course, but I'm not sure people will stand idly by for more than a couple of months, until they get their bank invoices.

In short, I don't understand how this won't end in a bank run unless national capital controls are put in place first (i.e. you can't move more than X money out of your bank accounts unless you can prove you have a purchase or investment to make).

EDIT: Never mind, I missed this answer...

This makes it harder for banks to hold profitable zero-risk investments. Since the banks fully understand that a negative rate on demand deposits will trigger a run, this will not propagate to negative rates for retail customers. So it mostly serves to reduce an implicit subsidy being given to banks, and forces them to hold their cash on their own books overnight, or loan it to one another, instead of storing it at the central bank.