This page has been archived and commenting is disabled.

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.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 06/27/2012 - 10:29 | 2564920 MsCreant
MsCreant's picture

[Deep sigh].

I'd almost think you were MDB, but I actually think you mean this. 

Wed, 06/27/2012 - 12:16 | 2565279 sessinpo
sessinpo's picture

I'll sigh with you.

This NIRP have been tried several times already and that was the exact rational. So far I have yet to see a positive result that was actually measurable.

Sigh

Wed, 06/27/2012 - 10:26 | 2564898 icanhasbailout
icanhasbailout's picture

at negative interest rates, why wouldn't you borrow every dollar you could and buy gold with the net?

Wed, 06/27/2012 - 10:36 | 2564948 Lucius Corneliu...
Lucius Cornelius Sulla's picture

Or cold hard cash as the debt ponzi collapses

Wed, 06/27/2012 - 18:28 | 2566650 mkkby
mkkby's picture

Because you could lose on that trade.  Simply put it in a longer term gov bond and make free money. Want to make more, increase leverage to infinity.

Wed, 06/27/2012 - 10:29 | 2564919 vamoose1
vamoose1's picture

to  cursive

 

     thats  a  great  great  post

Wed, 06/27/2012 - 10:32 | 2564933 Bansters-in-my-...
Bansters-in-my- feces's picture

We used to call tit twisters."Nirples" when I was a kid.

This NIRP sounds a little childish also.

Fucking Ponzi goes on...!!!

Wed, 06/27/2012 - 10:34 | 2564942 vamoose1
vamoose1's picture

morceaux  de  papier

   its  morphing  and  faster, look around, its  becoming  mainstream that  you  wouldnt  dignify  your ass  with  these  pieces  of  paper.    i  respect  my  bum,    its  performed   yeoman  service for  a  considerable  length  of  time,   i  think  gold  might  suddenly  get  serious.

Wed, 06/27/2012 - 10:39 | 2564961 unununium
unununium's picture

Just a reminder -- we've already had negative real deposit rates for consumers for 4 years, even using the rigged CPI.

Wed, 06/27/2012 - 10:42 | 2564974 disabledvet
disabledvet's picture

"Greek Vortex."

Wed, 06/27/2012 - 10:42 | 2564977 vamoose1
vamoose1's picture

jigsaw puzzles  commence  completely  incoherently ,  funny  shaped  things  in  a  pile.    then,  one  fits  another, then  a  third  fits  the  two.Then a fourth the three.

    it  gets  easier,  suddenly the  picture  forms, and  the  coordination  process  rockets ....  its  called  legitimizing  gold,   this  is  underway. Seatbelt sign.

Wed, 06/27/2012 - 10:44 | 2564983 PaperBear
PaperBear's picture

“Enter NIRP, aka Negative Interest Rate Policy.” And the capital destruction steps up a notch.

Wed, 06/27/2012 - 10:46 | 2564991 BlackholeDivestment
BlackholeDivestment's picture

Lawless criminals of the black hole ...bitchez. http://www.youtube.com/watch?v=PVTsBaqiNIg

 

Wed, 06/27/2012 - 10:47 | 2564993 Inthemix96
Inthemix96's picture

I kid you folks not.

Someone is gonna get shot over this, with extreme predujice.  This is fucking surreal.  Charging you for looking after YOUR FUCKING MONEY??

I fucking wish I could wake up from this, it feels like a bastard dream.

Wed, 06/27/2012 - 10:55 | 2565015 Bartanist
Bartanist's picture

A. At times like this I wish I had a REAL mattress instead of a water bed (just kidding got rid of the water bed years ago)

B. It sure seems as if there is an opportunity for some credit worthy entity to sweep in and gobble up deposits from "savers" for like 2% interest. The growth would be massive if they could publicize it. They could Ponzi it for a while, but would eventually have to find a way to make money with 2% money. Seems as if it should be easy ... maybe it is not.

Wed, 06/27/2012 - 10:57 | 2565024 magpie
magpie's picture

At some point, just taking your money out of the Eurozone should give you at least a  2 % return...

Wed, 06/27/2012 - 11:02 | 2565035 slewie the pi-rat
slewie the pi-rat's picture

so what?

we've been discussing NIRates for over a year here on zH

the SNB had had neg rates for weeks if not months and possibly the danes too, who also have a EUR peg and are printing with abandon, as policy

marioECB  has got a zombie on his hands;  it is just part of a fascist fiatsco shell game to transfer wealth to banksters thru their corporartions;  but the corporations are criminal organizations at this point and must be kept BK for defensive purposes

this is shaping up as a textbook crime against humanity imo and should lead to the greatest trial since nuremburg and thousands more hangings than after the last WWar;  this time, the financeers will swing on the ropes of shitheads formerly known as debt slaves and the military will be paid overtime for rounding then up (which was meant as a joke, but NAT0 and UN ginslingers prob do get OT, don't they?)

Wed, 06/27/2012 - 11:13 | 2565065 vamoose1
vamoose1's picture

these idiots  are  going  to reprice  gold,  put it  on  tier  one,   suddely  its  worth  8316,   italy  and  spain  are  magically  solvent,   grease oozes up  n   hits  the  sidewalk  cafes.   easy  options  squirt, this  is  easy,    mumble  here,  mumble  there,   revalue  gold  and  by  extension  silver

Wed, 06/27/2012 - 11:14 | 2565070 localpacific
localpacific's picture

eur/usd gets punk'd etc .... Short Term Technical Analysis 

Wed, 06/27/2012 - 11:14 | 2565071 yogibear
yogibear's picture

More reason to get out of the US dollar and Euro. Go ahead Bernanke and ECB destroy yourself with negative rates. The big money will shift and reward countries which are fiscally responsible.

Wed, 06/27/2012 - 11:22 | 2565097 JR
JR's picture

The end of the money Ponzi is getting closer; the central bankers can’t make this work without debt and taking what’s left. The Fed is the leader as the world’s backup, i.e., Go ahead, we have your back. When that’s gone, the banks start to fold…  The insolvency becomes front page…

Cashout is also a dilemma for retiring boomers, many of whom have their IRA nest eggs in IRA CDs for “safety” because their declining life span allows no time to take chances and make up losses from the stock market. The government does not allow these IRA funds to be held in cash under the mattress; if the lump sum is withdrawn and not rolled back into another IRA vehicle within 60 days, it is considered income for that year and is taxed as such (also, only one 60-day rollback is allowed per year). Depending on state income taxes and income bracket, a year’s income taxes could decrease a retiree's entire holdings by almost 40 percent – a tragic end to a lifetime of work and savings for one’s retirement.

It’s called entrapment, banker entrapment.

Wed, 06/27/2012 - 11:43 | 2565170 Montgomery Burns
Montgomery Burns's picture

Pay 40% to take it out now. Buy gold and silver and watch that double or more in the next few years. Go ahead and leave it in the ira and lose a few percent a year (or more probably) forever.

Wed, 06/27/2012 - 12:08 | 2565252 JR
JR's picture

Risk is risk. And with slightly more luck than in the silver market, the retirees can do at least a 1000 percent at Las Vegas.

Wed, 06/27/2012 - 11:56 | 2565206 Rastamon
Rastamon's picture

 

 

 

 

hahahaha..... welcome to Bernanke's PURPLE NIRP-LE on the USA

Wed, 06/27/2012 - 12:26 | 2565300 humblepie
humblepie's picture

NIRP? Best guarantee to blow up the EU. Bring it on!

Wed, 06/27/2012 - 12:48 | 2565373 swabeyjw
swabeyjw's picture

On the reset avoidance chart, conceptually I see negative interest rates as potential soft landing to extend and pretend.  Just wait until cash has an expiry date. Use it or lose it.

Let’s see how this can work:

1)   

Cash must be backed by gold.

2)   

Cash expires at 5% a year

3)   

If you hold gold, you can print 5%/yr +/- the market price ;]

Wed, 06/27/2012 - 15:40 | 2566081 Morrotzo
Morrotzo's picture

Do I undestand this correctly? Banks will charge the rubes to "hold onto the money" which is nothing but so many 1s and 0s. I can't even fuckin' remember the last time I got a paycheck instead of direct bank deposit and I've never been paid a 2 week check in straight money.

Every now and again the idea of banks charging people interest instead of paying interest is bandied about in America. It literally is Money For Nothing for the banks, a financial swindler's wet dream.There is only about 700 billion dollars worth of paper and metal U.S. currency out there so what would they be charging people for? What would they be "holding?"

 

Wed, 06/27/2012 - 22:23 | 2567159 WallowaMountainMan
WallowaMountainMan's picture

i gotta say, if i know the game, everybody knows the game. no one can win. just changing numbers with new numbers that, although they look different, mean the same thing: the system is failing to its mathematical death.

export via cheaper money vs export by cheaper money. that circuluar flow is of the down the drain variety.

Do NOT follow this link or you will be banned from the site!