NIRP Has Arrived: Europe Officially Enters The ‘Monetary Twilight Zone’

NIRP Has Arrived: Europe Officially Enters The “Monetary Twilight Zone” (ZeroHedge, June 5, 2014):

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.”

 

2 thoughts on “NIRP Has Arrived: Europe Officially Enters The ‘Monetary Twilight Zone’”

  1. This is insane. This will merely drive real money east to Russia…..they are paying 7.5% for money deposited…..Putin is so far ahead of the west……these fools are going to lose their shirts. Nobody is going to go for this, this is stupid, and it guarantees money flooding east, not into the western market.
    I read an article last week, I think it was on this site. The US economy is basically treading water, no new money is coming in. Half of the money comes from the $45 billion from the FED (down sharply from $85 billion 90 days ago), the rest is from corporations buying back their own stock.
    That translates into zero, no new money into the US market……..
    Why would the ECB move into negative territory? It will not bring in depositors, the response will be the opposite, they will take their money where they get paid to park it…..Russia.
    If I were not dying of a rare spinal disease, and had strength, I would emigrate to Russia. Putin has more sense that the entire western world, why can’t we get some leaders like him who actually work on behalf of the country? Our leaders work against us every damn day.
    This insane banker game in Europe will make things worse…….for all of us.
    I don’t know why they are doing this, it will not work. If I can see that, why can’t they? They don’t have the money they claim to have, and when that is exposed as regular people demand their deposits, and move their funds to other outlets, such as credit unions as many of us did in America…….it will be a nightmare.
    In the meantime, money will flood into Russia, regardless of Obama’s stupid games.

    Reply
  2. Marilyn,
    Don’t get upset.
    As Catherine Austin Fitts said when asked what justice she thought should be meted out to the banksters after the 2008 crash….

    “They were only doing what they were told to do”

    Our task is to try and foretell the consequences for us and, while there’s still time, take steps to benefit from what we have.

    Reply

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