NIRP Has Arrived: Europe Officially Enters The "Monetary Twilight Zone"

Tyler Durden's picture

Goodbye ZIRP, hello NIRP. Today's decision by the ECB to officially lower the deposit facility rate to negative (as in you pay the bank to hold your deposits) is shocking, but not surprising: we previewed just this outcome precisely two years ago in "Europe's "Monetary Twilight Zone" Neutron Bomb: NIRP"

Here is what we wrote in June 2012 about Europe's unprecedented NIRP monetary experiment.

Just because ZIRP is so 2009 (and will be until the end of central planning as the Fed can not afford to hike rates ever again), the ECB is now contemplating something far more drastic: charging depositors for the privilege of holding money. Enter NIRP, aka Negative Interest Rate Policy.

Bloomberg reports that "European Central Bank President Mario Draghi is contemplating taking interest rates into a twilight zone shunned by the Federal Reserve. while cutting ECB rates may boost confidence, stimulate lending and foster growth, it could also involve reducing the bank’s deposit rate to zero or even lower. Once an obstacle for policy makers because it risks hurting the money markets they’re trying to revive, cutting the deposit rate from 0.25 percent is no longer a taboo, two euro-area central bank officials said on June 15... “The European recession is worsening, the ECB has to do more,” said Julian Callow, chief European economist at Barclays Capital in London, who forecasts rates will be cut at the ECB’s next policy meeting on July 5. “A negative deposit rate is something they need to consider but taking it to zero as a first step is more likely.” Should Draghi elect to cut the deposit rate to zero or lower, he’ll be entering territory few policy makers have dared to venture. Sweden’s Riksbank in July 2009 became the world’s first central bank to charge financial institutions for the money they deposited with it overnight."

There is only one problem when comparing the Riksbank with the ECB: at €747 billion in deposits parked at the ECB as of yesterday, the ECB is currently paying out 0.25% on this balance, a move which may or may not be a reason for the depositor banks, primarily of North European extraction, to keep their money parked in Frankfurt. However, once this money has to pay to stay, it is certain that nearly $1 trillion in deposit cash, currently in electronic format, would flood the market. What happens next is unknown: the ECB hopes that this liquidity flood will be contained. The reality will be vastly different. One thing is certain: inflating the debt is the only way out for the status quo. The only question is what format it will take.

More from Bloomberg:

It won’t help the prospect of a functioning money market because banks won’t be compensated for the risk they’re taking,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. It would make more sense to lower the benchmark rate, thus reducing the interest banks pay on ECB loans, and keep the deposit rate where it is, Green said.


The ECB has lent banks more than 1 trillion euros in three- year loans, with the interest determined by the average of the benchmark rate over that period. Societe Generale SA estimates that cutting the key rate by 50 basis points would save banks 5 billion euros a year.


The deposit rate traditionally moves in tandem with the benchmark, which policy makers kept at a record low of 1 percent on June 6. Draghi said “a few” officials called for a cut, fueling speculation the bank could act next month.

Sadly, because all this is merely operating in the confines of a broken system, just as the LTRO provides a brief respite only to commence crushing banks such as Monte Paschi, so any further intervention by the ECB will only lead to a faster unwind of an unstable system.

Other institutions have opted against such a move. The Fed started paying interest on deposits to help keep the federal funds rate near its target in October 2008 and has reimbursed banks with 0.25 percent on required and excess reserve balances since December that year.


Some Fed policy makers last August argued that reducing the rate could be helpful in easing financial conditions. While they discussed doing so in September, many expressed concern that such a move “risked costly disruptions to money markets and to the intermediation of credit,” the Fed said in minutes published on Oct. 12.


The Bank of Japan (8301) introduced a Complementary Deposit Facility in October 2008 to provide financial institutions with liquidity and stabilize markets, and has kept the interest it pays for the funds at 0.1 percent since then. Governor Masaaki Shirakawa told reporters on May 23 there would be “large demerits” to reducing the deposit rate because it could lead to a decline in money-market trading.

It gets worse: by trying to help banks, the ECB will actually be impairng them:

If the ECB cut the deposit rate, it would take an important profit opportunity away from banks,” said Tobias Blattner, an economist at Daiwa Capital Markets Europe in London. By doing so, the ECB would also be “encouraging banks to lend to the real economy” even though “there’s hardly any demand for credit,” he said. Blattner predicts the ECB will cut its benchmark and leave the deposit rate at 0.25 percent.


ECB Executive Board member Benoit Coeure said on Feb. 19 that market interest rates of zero or lower “can result in a credit contraction.”


That’s because banks, trying to preserve their deposit bases by paying customers a reasonable interest rate, may reduce lending to companies and households because the return is too low and invest in higher-yielding assets instead.

Finally kiss money markets - which together with Repos are one of the core components of shadow banking - goodbye:

“A deposit rate at zero will be of particular support to banks in southern Europe because it could help encourage some flow of credit,” said Callow. “A negative deposit rate can be damaging for money markets.”


Negative rates would destroy the business model for money- market funds, which would face the prospect of paying to invest, said Societe Generale economist Klaus Baader.


“But the ECB doesn’t set policy to keep alive certain parts of the financial sector,” he said. “Policy makers want to show that they haven’t exhausted their options yet.”


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J S Bach's picture

Why would anyone ever put money into a bank again if they actually have to pay for the privilege?  The mattress is safer.

SafelyGraze's picture

it is your duty, citizen

now sing the anthem and get yourself bailed-in


SafelyGraze's picture

calling all stars of stage and screen to help raise money for this charity event


Haus-Targaryen's picture

Bullish for bubbles everywhere!

Peter Pan's picture

Can someone remind me why is gold paying no interest is a problem?

Haus-Targaryen's picture

Because look how great the S&P is.  All the smart money is going into the stock market.

Someone taught all those H&R Block morons the saying backwards;

"Buy high, sell low."

BobPaulson's picture

They are still doing lots on a daily basis right now to push gold down. All the suckers need to be in before you pull the switcheroo.

As for negative interest, it is especially effective anti-Robin Hood tool (rob poor, give to rich) when you force the proletariat to use the banks, since they will naturally opt for the matress if a NIRP world. However, in the new world order, you cannot have a job or buy anything bigger than a can of Pepsi without a bank account. This way the cartels get to skim everybody's savings with their insanely predatory service fees. These fees, by the way, operate like the rules in a Mooney indoctrination camp, by constantly changing so you cannot innovate behaviours to avoid them.

SamAdams's picture

Neg rates encourage physcial cash, gold, real estate.  The exact opposite of the end goal.

disabledvet's picture

This is just outright theft now. There is no way to prevent the private sector from being swallowed whole by the Government "automatons."

Capital (gold for obvious reasons...would you keep your gold in your backyard even?) is fleeing Europe...ironically to the USA which at least saw the huge inflation shock coming and tried to do something about it (taper.)

That will not be the EZ...where they never saw a cause to the Third Reich that they didn't like.

Treasuries obviously remain under pressure as there is no way the EU Banks are simply put mDe to be nothing more than shadow vessels for Government policy now.

PT's picture

So how long until I can borrow from the banks at a fixed, negative interest rate?  I got a shitload of stuff to do, I guarantee I can provide jobs for others along the way!

Of course I had to ask!  You don't ask, you don't get ...
... so everyone tells me when I don't ask because they told me not to.  Make up your fucking minds!!! ...

Pinto Currency's picture


Lots and lost of printed money hasn't work.

Draghi indicates the solution is lots, and lots, and lots of money.

That will work.

tonyw's picture

so we get rid of printed money, at least in the shape of cash and you won't have the option of keeping it under the mattress.

also gets rid of the "black market"

Pinto Currency's picture


Then you get massive barter and probably accelerate gold / silver's remonetization as a medium of exchange.

These central planners haven't got it all figured out.

old naughty's picture

Great, after 39 years since Rod departed, we have finally found another "Rod" to write the next episode of TTZ.

gh0atrider's picture

NIRP is what this has come to.  No more fucking around with your stupid doomer games. 

Get into some Bitcoin today!!

Anusocracy's picture

Economies without government: technology drives prices down, savers receive interest and the wants of the consumers drive innovation.

Economies with government: the government drives prices up, savers lose money and the wants of government drive innovation.

HardlyZero's picture

Pay as you go.

You have to pay them to give you your money.

The streams should be crossing sometime this weekend.

Conservation of Energy will probably come into the equation at some point and cause anti-gravity.

Bindar Dundat's picture

Finally a reason to accept a math based financial  system where trust is in the numbers  -- not in changing policies.  The current susytem is now officially FUBAR!  

Squid-puppets a-go-go's picture

well i wouldnt mind earning negative interest rates on my savings at 3-4% if it also meant that they pay me 5-6% of the remaining balance of my mortgage

that should be the logic of reversing the traditional nature of interest rates, right? Oh - no, its only on the savings component not the lending component . Funny that.

More fuel for the revolutionary bonfire

N2OJoe's picture

What a coincidence that we're now seeing a push for a cashless econoomy...

saveandsound's picture

So far the deposit facility rate of -0.1% applies only for banks putting money at the ECB's deposit. The banks can easily take the fiat from there and put it into their own books, getting an interest rate of 0.0% again.

Besides, an interest rate of -0,1% decreases M1 (slowly), doesn't it? But what do I know or understand...

Day_Of_The_Tentacle's picture

It seems to me that this is evidence that trust in the interbank lending market is still at basement levels. It looks like banks still prefer to deposit with the CB overnight rather than with other banks, who need the liquidity. Maybe this ECB move now and not two years ago suggests a new liquidity crisis is boiling just under the surface..... 

Relentless101's picture

Incentives are king. This will not end well. Banking in the Caymans and other banking havens will be the new normal for a huge population of europe. I honestly like the idea of possibly paying a bank to keep your cash safe. It of course wouldn't be a majorly lucrative model compared to the banks that take huge risk. But I think it could still be really profitable because a lot of people would buy into such a bank.

sushi's picture

Great thought!!

If you deposit in our bank we charge you 5% per year.

This generates new revenues that drives the stock price higher.

So the key to smart investing in to remove your funds from the bank and buy an interest in the bank.

Since everyone will soon be doing this financials will be driven ever higher.

This is great for pension returns.

Expect this model to come soon to a banknear you.


Five8Charlie's picture

My brain just exploded.

tonyw's picture

PT, don't be so ridiculous, if the banks had to pay you then where would they get their bonuses from?

ohcanada's picture

thirty seconds in he actually says "er, and, what I want to see now is a lot more fear about it"

CPL's picture

They are all replaceable now and will be replaced from news print to TV.  The world likes talking heads.  IT's offer is much, much cheaper and can look like anything you'd like it to look like.  No one gets old in a computer and they deliver stories on time.  Might not be great pieces of work at first, but considering no one is watching any of the cable news outlets anymore why would any general owner spend money they don't have to. 

That's the shape of the world today, the news is now an app.

Protip...this is now how you invest into media going forward.  You invest into the software.  Because the talking heads on TV aren't making rent by the numbers.

Cathartes Aura's picture


They are all replaceable now and will be replaced from news print to TV.  The world likes talking heads.

from reading & comprehension skills, straight to another yakky-voice in the mix, something barking in the background, to be tuned "in and out" as the distracted minds juggle incoming/outgoing "thoughts". . .

and of course, TeeVee delivering "truth in news" with perfectly groomed talking heads. . . a carefully sculpted non-reality, tailor-made to fit each consumer - how many folks already "talk back" and "argue" with their idiot box?      BFF.

Herd Redirection Committee's picture

"If we could let people consume news content passively"

Yep, this is exactly what they want.  Bypass critical thought completely, and you, the listener are glad you don't have to do that nasty business of thinking and analysis!

Cathartes Aura's picture

perhaps the "robots" everyone has been waiting on are already

amongst us.

Herd Redirection Committee's picture

The zombie apocalypse already happened.  They won.

Which is worse - bankers or terrorists's picture

Interesting to to think how this works in a cashless society.

Peak Finance's picture

This can only possibly work in the way they intend it ito work n a cashless society.  This, cashless, will be the next step in the grand ponzi. 

JRobby's picture

Cashless society works when: They (monarchs, oligarchs, whatever label you put on opressors) own it all, We (the rest of us) own nothing.

Getting closer to this. Still a ways to go. There will be resistance from those who are not "They" but have accumulated wealth not held in custody by banks.

Of course "They" control the police and armies............................

El Vaquero's picture

In the face of real armed resistance, the police will fold quicker than you can imagine.  My bet is that the US military is just as divided as the populace is.  In the event that bread and/or circuses breaks down, "They" will find that they control less than they think they do.

stormsailor's picture

saw a story last night about 5 police wounded, 3 dead in ontario canada.


did not have time to look at the particulars.

Herd Redirection Committee's picture

I think it was 5 shot, out of those, 3 dead, 2 wounded.

mkkby's picture

Vaquero, you haven't been paying attention.  They will hire mercenaries to do the killing.  Of course local cops and military will balk at the orders.  Think about some guys from India or Russia who don't give a crap about anything except money, or feeding THEIR families back home.

stormsailor's picture

its easier to spray the pink mist on a mercenary.  brain rainbow

PT's picture

Luckily for me I trust a complete stranger who lives thousands of miles away to look after the money I earn before I even get it.  Oh!  Wait ...

Jumbotron's picture

"Interesting to to think how this works in a cashless society."

Simple really.  Most Visa or MasterCard branded store gift cards do this now.  You have a certain amount of time to spend the credits electronically tagged to your card.  When that time limit is up....a certain percentage is deducted and put back into the system.  Sit on your ass too long.....and you have nothing but a piece of plastic in your wallet.

"What's in your wallet ?   Why nothing....nothing at all !"

JuliaS's picture

Cashless society with negative interest rates works like a monarchy. If you are a king's friend, you'll have a roof over your head, food on your table and the rest. Or you may be doing good work, producing valuables, but piss off the king once - and you're done. King's orders.

You friend with the King - the money you have is irrelevant, as you won't actually ever have to spend it. Cross the line and your savings are null and void.

Jumbotron's picture

Kinda sounds like this.....doesn't it.


The Mark of the Beast
16And he causes all, the small and the great, and the rich and the poor, and the free men and the slaves, to be given a mark on their right hand or on their forehead, 17and he provides that no one will be able to buy or to sell, except the one who has the mark, either the name of the beast or the number of his name.…

PT's picture

In times past, the mark of the beast could be simply interpreted as a tattoo.  But people could still trade without the mark - it could be too hard to enforce.

But nowadays scientists have been actively involved in producing the electronic implant mark where you truly won't be able to trade without it.  You'll still be able to barter, but if most of the stuff you buy is, say, over the internet, then chances are that you will indeed NEED that mark.

The book foretold, so many people don't believe, even as they actively seek to fulfill the book's prophecy.  Astounding to see.

Billy O'Naire's picture

Right now, the stock market is all about 'buy high, sell higher.'

El_Duderino's picture

But there is no inflation! Stock torpedoing all known records is perfectly normal in a recession. Welcome to the wonderful world of Draghinomics.