Europe's "Monetary Twilight Zone" Neutron Bomb: NIRP

Tyler Durden's picture

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.”

Regardless of what the actual outcome is, one person who will be delighted however, is Hugh Hendry. As a reminder, 'He’s made bets that he says will deliver a 40-to-1 return if the ECB cuts rates below 1% next year." Because in the end nothing pays off quite like levered bets on the stupidity and hubris of central planners.

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vmromk's picture

Lend my money to a criminal banker at a cool 0.25% interest ?  Just point to the the line so I can sign up.


Harlequin001's picture

Someone's going to sue their pension fund manager over this...

Why pay someone to owe you money, not hold your money for safekeeping but 'owe' you money when you can just buy gold.

Eventually the penny will drop, and the lawsuits will begin.

I know I would, if I had a pension, but sadly I stupidly tied all my money up in gold and silver.

Thick as fuck me...

Short Memories's picture

Cool, so govt's can pay me to lend me money and pay me more to keep it longer!

I'll vote for that too!

BLOTTO's picture

Can someone please fan the fire faster...


This limbo bimbo state is the worst fuckin shit.

nope-1004's picture

Aaaaaaaaaaaaaaaaaand..................... it's gone!


fockewulf190's picture

Thing is, the "Great Reset", when it comes, is going to demand tribute, and it will be a human killer. Stackers may survive the event horizon, probably by breaking upcoming new laws demanding they turn over their stacks, but the vast majority of the unprepared will be destitute, unemployed, and starving. Zero Hedge will be the place to come to too watch this beast emerge. Hope you Durdens got enough stack to keep this place open.

CPL's picture

Running a web service in that situation is easy.


It's whether or not your customers have power to turn on a PC, the infrastructure has power to run the layer 3 infrastructure to deliver the content.

If it gets that bad, most people will be dead of thirst by that point anyways.  It's how all water comes out of a tap if you are on central city water systems.  Need power to make water pressure.  Need power to run filtration and processing.  I believe Pakistan is now serving as a good example of the ineffectiveness of military, business and government intervention in broke assed economies and water management


Carl Spackler's picture

If they're going to charge for the privelege of holding and using my deposits, they I want them to pay me to BORROW money.


vast-dom's picture

this is all very unreal. not only are banks no longer in the banking business, they are headed for anti-banking business. and the central planners are completely out of control. maybe they rationilized that bank-runs will never occur since they are after all dealing with THE SHEEPLE.

they should increase interest rates and let this marketplace reset itself asap!

battle axe's picture

I did not think it was possible, but we have blown past "Full Blown Retard"....

The Gooch's picture

"Full blown NEGATIVE retard"!

cocoablini's picture

Go cash under mattress or.senior.debt markets. Put a fork in it

SheepDog-One's picture

Thats OK, I definitely dont need to pay someone to 'hold my money' I can do that myself just fine.

DeadFred's picture

That may work for you but where do you stash a few billion. There's an enormous amount of fiat out there and it has to be somewhere, mattresses don't come that big. Think of it as if the Fed et al. have been trying to save the world by printing cars, supply and demand says safe parking garages would be in high demand. How long will it be before some smart Swiss businesman starts the the first store-it-yourself cash storage unit. After that comes some entertaining episodes of Storage Wars.

SheepDog-One's picture

Well that sounds like a Central Bankster problem, not mine. Hell Central Banksters can pay 50% to hold their piles of money I dont care.

kridkrid's picture

I may have this all wrong... but... I think you hit on the eventual problem, no?  And it was mentioned in the entry above.  At some point this worthless money will no longer end up parked for zirp or nirp... that will be the "unleash the Kraken" moment.  Prices haven't "inflated" the way the hyper-inflationists have predicted because, quite simply, we continue to teeter on cusp of a deflationary depression.  That fake money sloshing around can't be "loaned" because there is no demand for it... so where does it go? 

unununium's picture

> so where does it go?

Certainly not into precious metals.  There isn't enough to go around, remember?

Ghordius's picture

well, Tyler has posted articles saying that in the US, most of it going into deleveraging the mountain of shadow banking liabilities.

I have not read it yet, but econmatters has here on ZH an article hinting that the deleveraging process "just got started in Europe".

Meanwhile, it's two officials speculating. And this talk is targeted at money market fund managers which are supposed to go into Timmy's USTs.

kridkrid's picture

IF we get to an "unleash the Kraken" moment, then sure... metals are likely the first to pop, I would think.  And I do expect this to happen, at some point.  But the real value in owning metals is that you might have a chance to trade if for whatever the new currency will be, after all of the existing currencies die (Edit: or, of course, use it as money, which it is).  Of course that is a society changing experience, and most likely not ushered in without out some sort of global military conflict... so it's really hard to say what things might look like after the transition.

Difficult to see.  Always in motion is the future. - Yoda

Lucius Cornelius Sulla's picture

It goes into the black hole known as debt default.  Defaults make money disappear as in poof!  Money printing is only filling in the great void by transfering the liability to the public.

robertocarlos's picture

If it wasn't loaned then it doesn't exist except as fake entries on the books. It can't be used to buy anything.

Poor Grogman's picture

This just proves that the zombie economy is actually dead,

More heroin will just make it rot quicker.

It's time to start the funeral arrangements.

Overfed's picture

For most regular and even fairly well to do folks, self storage is a workable idea. A million dollars worth of gold only weighs about 43 pounds.

bloostar's picture

My 100 trillion zim dollar note fits just fine under the mattress.. Wait a while and you'll get your usd under there too.. Won't be worth shit but it'll help with the bedding comfort.

agent default's picture

Yes you could, hence the drive for the cashless economy.  Then you cannot get your money out, and they can charge you negative interest rates.  Plus you cannot buy anything of value like gold without them knowing.

Aziz's picture

Dear Benny,

I would like to borrow $20 trillion at this NIRP please! 

I promise I will use this money to stimulate aggregate demand, and thus produce a recovery.




Dr. Engali's picture

Time to pull the deposits and put it under the mattress. This certainly won't end in a deflationary spiral.

machineh's picture

'Negative rates would destroy the business model for money-market funds.'

Oops, there goes another big chunk of the Shadow Banking System!

Deleveraging, bItcHEz! It's what's for dinner.

Cursive's picture

@Dr. Engali

Spot on.  This would be the end for bank deposits and the rise of National Mattress Savings & Loan.  Utter fail attempt, Mario.  It's one thing to debase the currency, but it's entirely another to charge people for the honor of being in the system.

rufusbird's picture

"May you live in interesting times" has arrived...

tonyw's picture

Please let me know where you live and how much is under that mattress?


fonzannoon's picture

Or pull deposits and buy real shit.

Captain Kink's picture

This is how the (hyper) inflation begins... buy now, before your "money" is taken away from you.  The institutional cash, where does it go?  eurodollars for now ?.... only if London is outside the scope of such actions.  Asian banks? Corporate bonds?  there is money to be made on this flight, but where?  UST? Really?  where thereafter?

Harbanger's picture

I never understood the point of stashing soon to be useless banknotes in your mattress.  Especially in an inflationary spiral.

Dr. Engali's picture

It's not an inflationary event. This would cause us to tip into a deflationary depression.

Harbanger's picture

I'm not sure how to deal with a deflationary crash.  I haven't given it much thought.  PM's would probably get smacked down pretty hard at first.  I have lines of credit I could withdraw at low interest before the banks change their mind.  I'm really not sure what I'd do.  What do think is a good way to deal with the possibility?

donsluck's picture

Sorry, had to junk you. This phase is the deflationary phase. PMs down, interest rates hitting negative. Remember, deflation is first!

Harbanger's picture

Negative interest rates, PM's down.  Sounds like an opportunity to borrow money and back up the truck. What do you think?

robertocarlos's picture

It will end in a deflationary death spiral. There are not enough trees to print all the money so what are you going to hide under the mattress after the banks close their doors? You will have to wait 10 years for your deposit insurance cheque. Longer than 10 years if you are under 99 years old. I'll be on the street terading my leather shoes for a sandwich. If i'm lucky.

Carl Spackler's picture

Time to pull the deposits and immediately convert into another physical medium of exchange, which acts like a REAL store of value.

Such is often referred to as GOLD !

Mister Ponzi's picture

(Sufficiently large) negative deposit rates are a sure way to create hyperinflation. At some level, all the hundreds of billions of excess reserves at the central bank will be withdrawn and will flow into capital markets, finally trickling down into the real economy. Think applying the historical money multiplier on today's monetary base. I doubt, though, that the levels of negative interest rates central bankers think about, are sufficiently large to cause this exit.

Dr. Engali's picture

If that money isn't in the capital markets now at these rates , it's not going in at negative rates. More than likely you will see bank runs.

Mister Ponzi's picture

At the ECB, you currently get 25bp per annum on your money. In 2YR Swiss, German or Danish government bonds you get less (and partly negative rates). If you are charged, say, 2 percent p.a. on central bank deposits, you won't keep any money there.

tmosley's picture

Don't be too sure.  It is likely a tipping point.  Once some start withdrawing, it will be a bank run.  Bank runs are already happening with ZIRP.  NIRP guarantees them.

valley chick's picture

unless of course they offer spiderman towels....

unununium's picture

Any mention of rehypothecated spiderman towels = automatic +1 from me.

Morrotzo's picture

Fuckin' towels didn't even have Spiderman on them! Goddamned stingy Kike bankers.



centerline's picture

Which implies they want to see bank deposit bases slammed - or at least cash being forced out.  Begs the question of what the real goal is here.  Seems it is the planned response to effects of NIRP that is goal, not NIRP itself.