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European Banks Are Paid To Borrow For First Time Ever As Euribor Goes Negative
Mario Draghi said this week that the transmission channels for European Q€ were opening up and crowed how well his cunning plan was working (by well we assume he means stocks are up). Today we get the ultimate test of that 'transmission' as 3-Month EURIBOR fell below 0.00% for the first time ever (likely wreaking havoc on European derivative pricing models). In English that means banks are being paid to borrow from one another in the interbank money-markets (which sounds a lot like a 'glut' of excess cash) seemingly confirming ICMA's de Vidts fears: "We are scared about the [repo] market freezing," as the ECB is "driving without headlights in the dark." Of course this is yet another disturbing distortion on the heels of homeowners being paid to take out mortgages...
Banks now paid to borrow from one another...
As fears of the repo market in Europe freezing appear to be confirmed... (via Reuters),
The European Central Bank (ECB) risks secured-lending or repo markets grinding to a halt unless it works more closely with national central banks (NCBs) to improve liquidity, a senior trade association official told Reuters.
The 5.5 trillion euro ($6 trillion) repo market is vital for banks and companies to manage their cash balances, offering short-term loans in exchange for government debt as collateral.
Godfried de Vidts, the chair of the International Capital Market Association's European Repo Committee, said unless the ECB took action within the next few months, investors might start avoiding euro zone bonds.
That might push borrowing costs up in the longer term.
"Investors could become reluctant to invest in euro zone debt," he said, noting that his committee had voiced its concerns to officials at the ECB.
The ECB has allowed bonds bought under its trillion-euro purchase scheme (QE) to be used as security for loans, a precaution against any surge in repo prices that might occur as QE sucks securities out of the market.
But traders say that the system does not allow bonds to be leased for long enough, is too restrictive on the amount parties can borrow and is very expensive.
"We are scared about the market freezing," de Vidts said.
In recent weeks, one 10-year Bund became so scarce that market players paid up to 2.5 percent to lend cash in exchange for the German bond, dealers said.
De Vidts said the ECB's "securities lending" framework also relies too heavily on NCBs offering their own lending programs, and many of them have not yet put systems in place.
NCBs are responsible for 80 percent of purchases under QE, with the ECB directly buying the remaining 20 percent in the roughly 7-trillion-euro euro zone government bond market.
"We are driving without headlights in the dark," said de Vidts, proposing that the ECB centralizes the scheme in Frankfurt.
"You are getting this scenario - which is a nightmare for the repo market – of a re-nationalization of a market that had developed to become European."
Last week, ECB President Mario Draghi said the bank saw no evidence QE was creating a shortage of bonds, or that this might happen in the future.
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This won't end well.
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I suppose that all EURIBOR adjusted mortgages will be going negative sometime soon.
I'm sure the whole system will be going negative sometime soon. Negative rates turn every single economic relationship inside out .... the system has not evolved for this and will likely suffer strains of Biblical proportions yet completely unforeseeable ... that ain't goona be good. Every relationship as we know and understand them, disappears.
There’s only one thing more oxymoronic than negative interest rate – negative salaries, when working stiffs start paying their employers. ;-)
Looney
While it is nutty, I get the rate suppression idea where a CB prints money, scoops up all the bonds, and forces the market to go along (unless they like that sexy junk bond over there).
But, isn't this the intra-bank lending rate (i.e. the rate banks charge each other to move reserves around)?
Low I get, negative I don't get at all. The government is about power/control, so they don't give a shit about making money per se, but banks shouldn't be engaging in business at negative rates regardless.
/Confused
Regards,
Cooter
EURIBOR = Euro Inter-Bank Offer Rate. So, yeah, it IS the rate at which "high credit quality" Euro-zone banks loan money to eachother. Which is why they are askeered of a freeze-up in the money markets. Sure, you'd love to get paid to borrow, but why would a bank on the other side of that transaction lose money to lend to you?
Winter is coming.
Lovin the GoT quotes.
Fear of the money being stolen if it is not "lent out" at all, chasing 10 year argentina bonds which yields 70% return over a 30 year average is a good reason to lose only .1% over 3 months or 3 years, it's all a matter of how YOU spin the #'s.
If Bank A borrows from Bank B at -.001% (or whatever negative rate), I presume cash goes from Bank B to Bank A at the stated rate. If Bank B had CASH, it would be a no-brainer to simply do nothing rather the book a modest loss (plus transaction overheads).
So, is that the freeze up ... or does Bank B not have cash at all but some other "cash like" asset that changes the decision calculus?
EDIT: Or, is this a new development and in the very near future logic prevails and banks stop lending to each other ... A.K.A. the ECB screwed the pooch?
Regards,
Cooter
Yeah, that's it. You got it.
As for it being new, well, sorta. Remember inter-bank lending is what stopped in 2008 but not because rates were negative. It was fear of counterparty risk. (You loan overnight but might get back nothing). This time it's feared this will be a slow grind lower and lower. Like throwing sand in the gears of interbank lending. The incentive to do it just went from 'meh' to negative.
Thanks. I am just trying to avoid getting hit by the proverbial train when it comes rolling through ... at least as best I can.
Regards,
Cooter
The ECB and every central bank are not driving without headlights...
They are driving down a straight road while looking in the rear view mirror with no headlights and think they have pulled off the greatest feat in human history because they have not come to a turn ...yet
I would like them to answer this. You must have the currency to buy the bonds with a negative yield. Why don’t they just keep the currency and not lose to the negative rate. I understand there are negative yields on accounts as well but even large institutions could take physical cash. Most large financial institutions have vaults anyway so there are no additional storage fees. Fiduciary responsibility anyone?
This will not end well.
I know if financial institutions were to do this the cracks in the failing system would widen, and result in more of a push for a cashless society, or a new currency but the flaws and fixes need to be made public anyway so it can be debated and discussed on a national and international level. I guess the last thing they want is an informed discussion, they want crisis followed by their solution, it just ticks me off.
It's a democrats job to know where you store your money, it's a republicans job to make sure you do something with it, there is no safe place to hide anymore.
In the U.S. the Federal Reserve DICTATES to large banks how much in U.S. Treasuries bonds these banks are REQUIRED to buy!! I am sure they would prefer to put there money elsewhere resulting in a higher yield. BUT when the Federal Reserve lends you money at near-zero rates, you do what the FED wants!
I presume the same is true of European banks and the ECB. You do what the ECB dictates or you are "toast".
You are right there are definitely regulatory/coercion at play in some of the cases, but not all.
Borrow a trillion at zero percent, then use the borrowed money to buy longer bonds at 1 or 2 percent, and earn 10 or 20 billion for doing what? Operating the scam. Where does the money come from to pay the interest? It comes from the taxes you pay, fool. How long are you going to let yourself get robbed by these criminals?
Funny things happen when you invert the time value of money. Well, not "ha ha" funny. More like "oh, shit" funny.
My old basis books don't have any negative rates and my HP12C flashes "error error error Will Robinson"
Gonna be a whole lotta shakin' goin' on!
Just go to the chapter titled "Negative Interest Rates," silly.
/s
As if having a license to create credit out of thin air and lend it was not enough?
pods
The quantity of money must increase exponentially, period. And it will!
Driving without headlights? Indeed!
Wow. Just....wow. It's too bad the sheeple can't get in on some of that interest fr4ee action. The best rate I can get on a 20 year loan is 3.65%, and I can't buy any points.
What a FUBAR Market!
Just paving the way for small depositors to also pay banks for the privilege of holding the small depositor's money.
Under such a scenario, if I were a bank, I would borrow all that I could. It's all electronic money at this point. Only now you get paid to add zeroes to the computer at your bank!
Mr. Keynes .... you barbarous relic !
Oy vey! Retail borrowers should be so lucky....
A race to make your country's currency trash.
Round-robin QEing. Soon the Federal Reserve's QE4.
Ever-larger QEs until a currency crisis and someone blows up.
I'm going to the pub. The bartender is buying the customer the drink and he's paying for it too!
Is the bartender a good tipper? I may change drinking venues if that's the case.
And the waitress tips you! Please don't be too heavy for her.
Duh! They are desperate and have run out of options. “When it gets bad you have to lie!” Pushing markets higher is all they have left, and if that fails, total collapse comes quickly as the dominoes fall. The wealth effect and cheap money are their resort ideas to stall the final collapse. Bears have been burned so many times by the central banker induced wild euphoria and cutting off of other options, most have lost track and lost their money. Who would sell stocks knowing the Fed Bank has guaranteed them? Rate hikes will never happen…they can NEVER end the easy money. Everything now depends upon it…the New Normal must go on forever. If it ever stops working…look out below.
...said de Vidts, proposing that the ECB centralizes the scheme in Frankfurt. lulz
So after 5000 years or so of recorded economic history and transactions, a bunch of fookig clowns have devised and applied a negative interest rate for the first time.
This is worse than taking an Alzheimers patient to a quiz show and expecting to win.
Why not pay the hungry to eat bread instead so they can survive? Instead of giving virtually interest free money to those who have run out of things to buy and do.
They are all morally bankrupt in addition to being economically bankrupt.
So why can't Greece get paid for all the money it owes?
This is all starting to sound so screwed up you would think a mental hospital is in control of Brussels and the ECB.
what about ending the "scheme" called "repo" market and exposing it for what it is, leveraged games between financial players - rehypothecation of collateral (govies).
companies don't need this crap, who needs commercial paper anyway when it earns nothing. it's just a scheme to keep risk assets afloat and trading desks important (and rich).
but they will talk about centralizing it and how "vital" that is. it's the opposite of what is real. much like the NY FED centralizes it over here - the more "centralized" it is, the more easily manipulated.
negative interest rates were coming anyway via absent economic growth. it matters not that you lose 0.2% or 0.4% on your principal. what matters is the message implied that if risk-free paper takes such a haircut, all risk assets should be priced 30-80% cheaper.
If low interest rates grow an economy, less than zero rates grows it faster. This is great!
The new and improved EURIBORROW coming to a friendly TBTF near you!
"Borrow Your Way To Wealth!!" - A proven policy since 1913.
why not put banksters in jail?
This is great....hookers pay me. But I have to pay my boss. Still it is net positive as I can party harder than I work. So, I am OK with the new paradigm.
They don't like the way the "normal" world works, let them try the "bizzarro" way.
SNAFU