A government-backed Revolt against NIRP-Obsessed Draghi
On the fateful day of June 8, when the ECB began buying euro-denominated corporate bonds, some of which now trade in negative-yield absurdity, the two biggest German banks counter-attacked in a well-coordinated two-pronged move.
Commerzbank, of which the German government owns nearly 16% as a consequence of the bailout during the Financial Crisis, leaked to Reuters with impeccable timing that it was considering hoarding tons (literally) of cash in its vaults rather than paying the punishment interest on deposits at the ECB.
That “punishment interest,” as Germans call the negative interest the ECB charges for deposits, is -0.4%. Currently, Eurozone banks have €850 billion on deposit at the ECB, so the punishment interest would cost them €3.4 billion per year.
The ECB is on a bond-buying frenzy, which creates a sea of liquidity – the money that the ECB “printed” to buy the bonds with – and banks end up with it. They’re supposed to lend it out, but demand for loans for reasonable projects is low, given the dismal investment environment in the Eurozone. So the liquidity just sloshes around and distorts and corrodes everything it comes in contact with.
These “sources familiar with the matter,” apparently “two officials, who asked not to be named because of the sensitivity of the matter,” told Reuters that Commerzbank has not made a decision yet. But the bank has “held discussions on the matter with German authorities.”
A Commerzbank spokesman told Reuters that the bank wasn’t stuffing cash into its vaults “at the moment” and refused to say if it would do so in the future.
The fact the government owns part of the bank and that the bank is in discussions with the government on this matter give this an aura of a government-sanctioned revolt.
A slew of German politicians have already lambasted the ECB’s negative-interest-rate absurdity and its bond buying program, and the damage and distortions they were causing.
“It is undisputable that the policy of low interest rates is causing extraordinary problems for the banks and the whole financial sector in Germany,” Finance Minister Wolfgang Schäuble told Reuters in April. “That also applies for retirement provisions.” With his bone-dry cynicism, he added, “That is why I always point out that this does not necessarily strengthen citizens’ readiness to trust in European integration.”
Commerzbank isn’t even on the forefront. But it’s the biggest German bank to leak those considerations.
In early March, The Association of Bavarian Savings Banks, which represents 71 savings banks in the State of Bavaria, leaked an internal memo to the Frankfurter Allgemeine that openly encourages its member banks to stash cash in their vaults rather than depositing it at the ECB and paying the punishment interest. To make that decision easier, it estimated the costs of holding “high cash values” in their vaults. The majority of those costs relate to the additional insurance coverage required for “ECB-cash protection,” as it said.
Those estimates were done when the punishment interest was -0.3%. Meanwhile, the ECB has raised the punishment to -0.4%. Hence, the benefits of hoarding cash are even bigger.
Reuters reported that European insurers “say they have received an increasing number of inquiries from banks examining such a move.” So this isn’t an isolated pocket. A lot of banks are now weighing the benefits of hoarding cash.
Also on that fateful June 8, Deutsche Bank, Germany’s largest bank, attacked the ECB from another direction.
David Folkerts-Landau, Chief Economist, published a scathing 12-page document, signed off by two editors and Stuart Kirk, Head of Multi-Asset Research. So this is not the crazed rant of some frustrated and wayward analyst but something close to the official word of Deutsche Bank. ECB policies are threatening to unravel the entire European Union, he wrote. Some excerpts (emphasis added):
After seven years of ever-looser monetary policy there is increasing evidence that following the current dogma – broad-based quantitative easing and negative interest rates – risks the long-term stability of the Eurozone.
But the ECB’s response is to push policy to further extremes. This causes mis-allocations in the real economy that become increasingly hard to reverse without even greater pain. Savers lose, while stock and apartment owners rejoice.
Worse, by appointing itself the Eurozone’s “whatever it takes” savior of last resort, the ECB has allowed politicians to sit on their hands with regard to growth-enhancing reforms and necessary fiscal consolidation.
Thereby ECB policy is threatening the European project as a whole for the sake of short-term financial stability. The longer policy prevents the necessary catharsis, the more it contributes to the growth of populist or extremist politics.
Another problem is that games of largess and moral hazard are hard to quit. The ECB has become the henchman of ever more demanding markets, with investors already braying for another extension of quantitative easing by September. There is also evidence that current policy reduces the pressure on banks to increase capital and to clean up non-performing loans (NPLs) and thereby keeping unprofitable companies in business.
It goes on page after page. And it tells the ECB what to do: back off. The whole thing is titled, “The ECB Must Change Course.”
Note the word Must.
Draghi’s scorched-earth policies have long been under attack by different players in Germany, including life insurers and pension funds. The ECB is undermining Germany’s retirement system; it’s already listing and will collapse if the ECB stays on this track. But the day the ECB stepped over the Rubicon and began buying corporate bonds was the first day that the two biggest banks in Germany, jointly, and from two different sides, with apparent backing from the German government, publicized their counterattack.
However, German exporters and industrial companies benefitted from the ECB’s policies, so they remained studiously quiet, for most part. Other groups benefited too. These policies are a wealth transfer, and there are happy recipients of this wealth. And hedge funds betting on what the ECB would do next profited from those policies, particularly those funds that belong to the select groups the ECB meets with in secret to pass on info about future moves. Read… This is How Draghi Will Sock it to Investors that Weren’t Invited to the Secret Meetings
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.