Negative Interest Rates Bite: Bundesbank Warns of Risks to Financial Stability, Moody’s Downgrades Outlook for German Banks

Yield-starved banks expanded lending to “relatively high-risk businesses” and to the property sector, as the Bundesbank considers house prices in many cities overvalued by 15% to 30%.

By Nick Corbishley, for WOLF STREET:

The “risks to financial stability have continued to build up in Germany,” the Bundesbank warns in its Financial Stability Report, published this week. One major risk highlighted by the central bank is that Germany’s current economic slowdown — the result largely of “unfavourable external economic developments” — could turn into an “unexpected economic downturn”.

The country’s export-led economy has barely grown in the last five quarters as global trade has slowed. If the situation gets much worse, it could trigger a “deterioration in the debt sustainability of enterprises and households,” which in turn could lead to cascading loan defaults and credit write-downs.

Many yield-starved banks have significantly expanded their lending to “relatively high-risk businesses” while simultaneously reducing their provisions against losses on lending. As the Bundesbank puts it, “there are signs that banks’ lending portfolios now include a higher share of enterprises whose credit ratings could deteriorate the most in the event of an economic downturn.”

The banks are also heavily exposed to the fast-growing domestic real estate market, one of the few in Europe to have avoided a slump in the wake of the 2008 crisis. Since then, prices have surged as investors, domestic and foreign, have poured funds into real estate, and banks have shifted their focus toward property transactions.

Last year alone, house prices in Germany grew at an average rate of 8%. The Bundesbank estimates that property prices in German towns and cities are overvalued by between 15% and 30%. According to the 2019 Global Real Estate Bubble Index, housing in Munich is now the most overpriced in the world.

If the economy’s slowdown turns into a downturn, as the Bundesbank fears, Germany’s property boom could turn to bust, leaving investors, banks and developers shouldering large losses. Yet for now, surveys suggest that both households and lenders expect prices to continue rising long into the future. As the central bank notes, even as Germany’s macroeconomic situation deteriorates, the persistently low interest rates not only help to mask that reality, they provide ideal conditions for the financial vulnerabilities to grow further.

Moody’s picked up the cue and has downgraded its outlook for German lenders from “stable” to “negative” as profitability and creditworthiness deteriorate in a negative interest rate environment. Its report, published on Thursday, warned that the already weak profitability of German banks will decline further over the next 12 to 18 months.

“Banks’ weak profitability will decline further as net interest income falls,” the report said. German banks have been dogged by low levels of profitability. As of 2018, banks in the country had an average return on equity (ROE) of just 2.4%, the second lowest level in the EU after Greece and sharply lower than the EU average (6.1%).

There are two main things that set Germany’s banking system apart from the rest of the EU:

Its two biggest banks are struggling. Deutsche Bank, Germany’s largest bank, has notched up multiple quarters of heavy losses, has lost over 90% of its market value since 2007, and has faced numerous criminal investigations. Germany’s second largest lender, Commerzbank, was bailed out in the last crisis, is still partly state owned, and has seen its shares plunge in value by over 98% since 2007.

Germany is teeming with over a thousand unlisted savings banks and cooperative banks, which collectively account for over half of the banking system. These banks tend to be small, local and normally lend for productive purposes. Thanks to their prevalence, competition in Germany’s banking sector is more intense than in most other large developed economies, which translates into lower margins and profits. Many of these smaller lenders have borne the brunt of the ECB’s negative interest rate policy, which is as unpopular among the banks as it is among the country’s savers.

Even as the ECB pushed its deposit rate below zero, and as many bond yields have turned negative, customer deposits in Germany have continued to grow as most investors continue to shun equity investments. This has heaped yet further pressure on the banks’ already slender interest margins.

“Traditional commercial banks and in particular deposit-funded institutions will struggle to out-earn their costs in the continuing low interest rate environment, even though loan-loss provisions are unsustainably low,” Moody’s said. Even the ECB warned this week that falling bank profitability resulting from negative interest rates, which it itself is responsible for, poses one of the biggest threats to economic growth and financial stability in the region.

While many of Germany’s larger banks have passed on the cost of negative interest rates to their corporate clients, small banks, long accustomed to making money on the spread between the interest rate they pay on deposits and other funding sources, and the interest rate they charge on loans, realize that most of their retail customers won’t accept negative interest rates on their deposits. Rather than paying for depositing their funds or savings, those customers will yank their money out and put it elsewhere.

One tiny cooperative bank near Munich, Volksbank Furstenfeldbruck, took the leap this past week and became the first German lender to pass on the cost of negative interest rates to new retail customers with small deposits.

Meanwhile, the German government, in a bid to placate the country’s legions of long-suffering and increasingly irate savers, has even threatened to outlaw negative deposit rates altogether. By Nick Corbishley, for WOLF STREET.

The losses are now becoming clearer after a “run on the fund,” triggered when people figured out it was loaded up with crappy illiquid assets. Read… Screwed Investors Still Stuck in Woodford’s Imploded Mutual Fund Get a Glimpse of Their Losses

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  74 comments for “Negative Interest Rates Bite: Bundesbank Warns of Risks to Financial Stability, Moody’s Downgrades Outlook for German Banks

  1. NARmageddon
    Nov 22, 2019 at 2:41 pm

    Seems that the ECB answer to the Eurozone crisis has been essentially to create a housing bubble in Germany. Germans did not, I think, have a housing bubble the last 40 years, until now.

    Very unfortunate.

    • nhz
      Nov 22, 2019 at 2:59 pm

      Germany was indeed about the only eurozone country without a housing bubble before 2008; that has been corrected now, mission accomplished :)

      But of course the German bubble is a joke compared to the much larger bubbles in some neighbor countries like Netherlands. Just across the border in Germany the price of a similar house is often 50% lower than in Netherlands, travel 20-40 km further and the prices are even lower. The whole Netherlands is housingbubble central now (maybe except the extreme NorthEast that suffers from frequent earthquakes due to gas drilling). In Germany the bubbles are mainly around a few hotspots like the financial and industrial centers, in the rest of the country the price increases were mild compared to most other EU countries.

      But you never know, RE funds are advertising on Dutch TV that you too can profit from the RE boom in Germany, and squeeze a few German renters out of their homes with outrageous rent increases – worked like a charm in Netherlands, rinse and repeat with the blessing of count Draghila and friends ;(

      And if you think the runup in home prices is bad, just look how the elite is suffering ;) In my area a modest vacation home used to cost 200-300K some fifteen years ago (the starter price for a home that can be used as residence is around 300K; you are not allowed to live in a vacation home). But prices have increased hugely after 2008 and ever bigger and more investor properties are being build all over the province, destroying the last bits of nature. Prices now start around 450K and the AVERAGE price of a “vacation” (speculator) home went past 700K euro last year. Several of the developments that are being built now have homes starting at 1.1, 1.2 or even 1.5 million euro and some of those millionaire homes have just 100 m2 living space. In some of the small villages near the coast everyone is converting their garden shed to a vacation home that sells or rents (usually on Airbnb) for outrageous prices; while a few people (primarily politicians I guess) make huge amounts of money, young people can no longer afford a home an leave, the social fabric is destroyed and all services disappear because almost nobody lives there. Great, thanks ECB :)

      • Clockwork Orange
        Nov 22, 2019 at 4:34 pm

        Exact. Well, hello and welcome to the financialised world of cannibal capitalism!

        • Beardawg
          Nov 22, 2019 at 7:23 pm

          I admit I am not the sharpest tool in the shed on world financials, but I am not understanding how savers suffer in an NIRP environment. A dollar stuffed in the mattress vs paying 2cents on the dollar to keep your $$ in the bank seems like savers win ??

        • nhz
          Nov 23, 2019 at 4:37 am

          @Beardawg:
          Savers suffer because in addition to NIRP they are subject to inflation (and wealth taxes, in some countries) – whether they save in the bank or at home.

          With ZIRP or NIRP at maybe -0.5% rate it doesn’t make much sense to withdraw cash. You still suffer inflation (in my EU country currently 2.7%, which is a huge understatement) and withdrawing cash, or having it re-enter the financial circuit, costs money (around 0.5% in my country). For larger amounts there is the serious risk that authorities will mark your cash as illegal when it hasn’t been reported to tax authorities while stored at home (in order to avoid wealth taxes and other risks), which risks losing it all.

          You are right that “savers” (I guess you mean people who save cash at home?) win compared to those keeping money in a savings account when NIRP gets below minus 1% or so. But there is a good reason we haven’t seen such negative rates anywhere in the world ;)

      • MC01
        Nov 23, 2019 at 2:34 am

        All Europe except perhaps France has a real estate bubble right now. France as usual is a little different: prices have gone up but nowhere near as in Germany and Spain. The problems there are others and far more intractable.

        However this real estate bubble had the notable effect of squeezing yields for REIT.
        Yearly yields for German REIT used to be in 7-8% range and were almost as risk-free as investment-grade bonds. Pension and family funds piled into them for decades.
        Last Summer when I was looking into them yields had gone down to 4.5% and right now 4% seems to be the norm. Oh: you still have to pay taxes on top of that.
        Turns out that using the slumlord approach doesn’t work to increase yields.

        Residential rent contracts in most German Länder are ironclad, and you just cannot hike rents like that [snaps finger], let alone kick out somebody who has always been paying on time and to the last pfennig.
        Commercial rent contracts, especially older ones, are somehow even more ironclad and somewhat similar to Spain’s rentas antiguas: that’s how those stores nobody ever visits are able to stay in business despite being stocked with dusty 80’s vintage goods. ;-)
        If you want to raze the building to erect a monument to hipsterism (complete with the invariable gym and Starbucks) you need to do it by the book. It means giving tenants ample warning to move out and often to compensate them. Given the cost of litigation throughout Europe it’s often just cheaper to pay people to move out.

        Rents are exactly like yields on financial products: they may be impressive in absolute terms but once you look at how much it costs to get that yield it doesn’t look like a bargain anymore. And real estate is more complicated than simple financial products: financial products only cost you a fee and capital gain taxes (you may defer them or get a tax cut but you always have to pay them in the end) while real estate is a never-ending headache. It’s not merely a matter of pocketing rents and paying property taxes: you have to be prepared to handle them, and most recent arrivals on the market are no better prepared than the forty-niners were to look for gold in California.

        The first forty-niners made a killing in California, and most of them were wise enough to sell their claims and set up other bsuinesses, but those who arrived later were lucky to break even and most ended up losing what little money they had.
        This stuff is no different.

        • nhz
          Nov 23, 2019 at 4:52 am

          Both France and Spain (and probably many other countries) have areas with very mild price increases and some areas with bubble prices (in France e.g. around Paris, the Riviera etc.). Many more attractive properties like small castles and mansions in France have gone up tremendously over the last 20 years. Even in the late nineties you could find many nice castles for just Hfl. 300-400K (around 200K EUR), now it’s more like 1-2M EUR. At the same time, in both France and Spain homes in more remote rural locations (with little tourist attraction) can sell for next to nothing.

          While prices on the Spanish Costa never went down to reasonable levels after 2008, the market in most of the inland is relatively dead and hardly more expensive than 10 or even 20 years ago. Probably similar to what one can see in other large countries like the US ;)

          Agree about rents. The German REITs are still advertising 7-8% ROI on Dutch TV, but I don’t believe it for a minute. But that they are advertising there tells you that they must have plenty of customers. The same happens with German “investors” buying vacation properties in Netherlands: many are fleeced with devious tricks, like selling them the home with very elevated (fraudulent) appraisals on paper with a cheap mortgage, paying them a nice ROI every year until they want out and suddenly find that they have to sell back to the property company and get less than 50% of the initial purchase price back. Apparently investors who are fleeced don’t talk about it because they have been pulling this scam over here for more than 20 years already.

          BTW, from what I understand residential rent contracts in Germany are no longer ironclad for new contracts. Much like in Netherlands where existing renter protection is at idiotic levels (it often takes 3 years to evict someone who doesn’t pay the rent and trashes the property) but most new rental contracts are temporary 1-2 year contracts with very little protection for renters and all benefits for the investor. Over the years many rental properties in the social sector have been sold for big money when tenants leave and this works great to drive up rents, also because almost zero rental housing as been build over the last 20 years. I just noticed a 60 year old ex-social housing property for sale in my hometown for 450K; this it the kind of home that the average “refugee” would refuse if offered for free. Probably same thing going to happen in Germany.

        • FP
          Nov 23, 2019 at 9:50 am

          There are large amounts of houses in small cities, villages in spain, many of them belonging to banks, which sell for less than 30k but which are in fact worthless, places which are loosing population at fast pace, far from the coast, thousands and thousands of houses with a real value 90% lower than selling price, hopeless.

        • Old-school
          Nov 23, 2019 at 11:24 pm

          I read in the modern world we are primarily economic agents. In a way it becomes a war of us trying to act in our own interest vs. governments acting in their interest. Our interest is unique to us as individuals and the government’s is an accumulation of 200 years of laws politicians have passed to get elected. Governments overspend and overpromise and then they have to figure out another way to pluck the goose. This time it’s zirp or nirp.

      • Xabier
        Nov 23, 2019 at 7:01 am

        Fascinating.

        But what, at this level of over-development, are they vacationing for: to look at other vacation homes amid the sound of construction?

        • nhz
          Nov 24, 2019 at 5:40 am

          Probably looking for more vacation homes to buy yes. I see a lot more expensive German and Belgian cars with very few passengers driving around lately, but very few people on a real vacation. Of course I don’t see everything, but the only real vacation destination over here is the beach which isn’t attractive to the average tourist outside the summer. There are no real tourist attractions and all nature has been thoroughly trashed over the last ten years to please the investor class.

          It’s also a stunning contrast with the situation in the cities where home prices and rents are sky-high due to severe housing shortage, mainly because local government is driving land prices for new homes to levels that are unaffordable even at 1% rates. The glimmer of hope is that one day these equity locusts will disappear and the housing shortage will be instantly solved, especially in the smaller villages where people will have multiple nice homes to chose from ;) But I guess this will only be allowed to happen once the whole province is under water (predicted to happen around 2100, but could be earlier).

      • Old-school
        Nov 23, 2019 at 3:37 pm

        Does the government still tell you there is very little overall inflation because they don’t include the real cost of housing?

        • nhz
          Nov 24, 2019 at 5:51 am

          Government has a very clever way of calculating housing cost: they ask homeowners what they think it would cost them to rent the equivalent home (imputed rent?). Of course most homeowners are totally clueless about real rents (currently 3-5x more expensive than the mortgage cost) and think renting would be even cheaper than their current interest-only 1% mortgage …

          Another problem is that Dutch homeowners are heavily subsidized from all sides (they pay less than half of the real cost) and the rental market is primarily social housing which is heavily subsidized. People pay around 30% of their social security income for rent, whatever the real cost of the home is; the rest comes from the government. Social security income and rents in the sector have more or less tracked official inflation over the years. The result is that rents in the social sector are ricidulously low now compared to the much smaller “free market” rents. An average townhouse with small garden that costs EUR 280 for someone on social security (e.g. a single mom or a newly arrived migrant couple) would easily fetch EUR 1500 per month in the free market, and I see them advertised for prices up to 3000 EUR (usually for temporary workers who get all costs paid by their employer).

          Real rents in the free market have increased by over 100% in the last ten years, and even more in hotspots like Amsterdam. Current increase is 10-20% per year and renters in the free rental market already spend about half their income or more on rent; but government and the news media keeps stating that inflation is (too) low – which is true for some people but totally wrong for many others.

    • NARmageddon
      Nov 22, 2019 at 4:52 pm

      Thank you for the insights.

  2. Nov 22, 2019 at 2:48 pm

    I assume the EU sets the negative rates, and the pushback is from these small German banks, who have retail depositors (big banks and corporate clients go along. The cost of doing business?) I have felt for sometime that the US banking system must be near revolt. If they could set deposit rates and lending rates they could probably do a decent business. One good reason to get the Fed out of setting interest rates and the banking system, and let them play hide the salami with the Treasury department all they want.

    • historicus
      Nov 30, 2019 at 6:26 am

      Agree, Ambrose.
      And the ECB sets rates for a currency (the Euro) that has been around how long?
      The fragility of the EU, with Brexit being perhaps the first, is manifest. And the ECB dictating rates across the EU is as abrasive as Brussels telling the British citizen what to do.

  3. nhz
    Nov 22, 2019 at 3:09 pm

    BTW, I don’t think Dutch zero-down mortgages and other crazy ideas like government-sponsored mortgage insurance (you can never lose money when selling your home) and full mortgage tax deduction (taxpayers pay about half the mortgage) exist in Germany. If there is a downturn, the German property owners – and not the banks – will bear the first losses. In Netherlands in practice it will be savers with over 100K and taxpayers that will be on the hook for a housing downturn, and not the countless speculators. I guess you need a quite serious downturn before the banks get in trouble from underwater mortgages; by that time the whole Netherlands would already be bankrupt, assuming a similar price decline.

    • Unamused
      Nov 22, 2019 at 6:04 pm

      I guess you need a quite serious downturn before the banks get in trouble from underwater mortgages; by that time the whole Netherlands would already be bankrupt

      Even without a housing downturn, a lot of the Netherlands is already underwater, or at least below sea level.

      The life of a big-time banker must be a thankless one. Every few years you go broke again and need yet another gigantic bailout. Everybody thinks you’re a crook, when all you’re really trying to do is help people. It’s a wonder anybody bothers. I just don’t see the attraction.

      Just how do bankers initiate a residential real estate bubble anyway, when you don’t have wealthy Chinese buyers to blame?

      • nhz
        Nov 23, 2019 at 5:01 am

        it’s funny how the Netherlands spends about 10x more money every year for keeping mortgages above water compared to keeping real homes above water (dikes and other flood prevention). In 50 years half the country could be uninhabitable due to flooding if the more serious global warming predictions come true; but for now there is zero action from politics, just talk (not much different from what I hear from e.g. Miami in the US). For sure feeding the housing bubble is way more important than the future of the country.

        And yes, the epic Dutch housing bubble was arranged without any Chinese buyers (and very few foreign buyers in general). We must have the best bankers in the world ;)

    • Old-school
      Nov 23, 2019 at 3:53 pm

      I feel fortunate to live in a place that still isn’t filled up yet so there are a lot of options for housing if you are retired. I have got a great situation renting for last 12 years, but I always am looking for options in case I need to move.

      I probably will end up with parents home (will need to buy out my brother’s half. ) It’s a 60 year old small brick ranch that will not be worth much to anyone but me because it was always filled with love.

    • Old-school
      Nov 23, 2019 at 7:03 pm

      Hi NHZ,

      I have been doing my tax planning for 2019. I thought I would demonstrate our tax system which I try to be a master as we all hate taxes. I live in USA state of NC. I am retired, am on obamacare, not by choice but the carrot and stick kind of forced me into it. I am 63. My social security is $21,000. Then I have to determine how much I want to pull from retirement accounts. Basically it goes like this because of deductions and taxes:

      I hit first tax at 5.5% NC state tax at $29000 gross income including social security.
      I hit 2nd tax of 10% at $33,200 on nonsocial security income.
      I hit 3rd tax of 10% on 50% of my social security at $33,200 also
      I hit 4th tax on Obamacare at about $40,000 and it is a graduated tax rate so let’s just say 10%. For most people this kicks in lower but I chose a low cost plan and my age makes kick in high.

      So anyway the system lets you off the hook up to $29,000. From $33,200 to $60,000 you probably are giving the tax man 40%. If you want to spend it on most things in NC you will pay about 7% sales tax. Property tax varies from 0.5% to about 1.7% depending on where you live.

      I retired at about 50 but I am actually still going to have trouble pulling my funds out at a low tax rate as if I pull funds based on my life expectancy it kicks me up around $40,000. I have another set of funds that are Roth and tax free but that is a smaller amount.

      I think I want to warn people about thinking about an exit strategy with funds. Maybe somewhere around $500,000 – 750,000 is the Max you should shoot for in traditional 401K / IRA and then use other vehicles. Maybe holding nondividend paying stocks outside of retirement accounts which I have never done. I always funded Roth but was limited by law to $2000 per year in early days.

      • nhz
        Nov 24, 2019 at 6:16 am

        It’s even worse here: you get ZERO social security if you have equity e.g. savings over EUR 5000 (in some cases 30K is allowed e.g. in the form of equity in the home you own; most other possessions like cars, yachts etc. don’t count for social security). I’m a bit younger than you and currently semi-retired due to serious health issues many years ago.

        Because I was self-employed and have significant savings – initially partly as private retirement funds – I don’t get anything from the state but instead pay huge taxes because of “early retirement” when using my retirement funds, plus a yearly wealth tax because the government assumes I’m making at least 7% yoy on my savings account. When I’m around 70 I should get the allowance for retired people which is slightly above social security now, but likely to be cut in future. By that time all my retirement money will have vanished and for sure just renting a home will be higher than the whole allowance. Some of my money is in the company I owned and that is taxed at 65% if I extract the money before retirement age (of course, waiting until then also has a high cost through inflation etc.), a bit similar to your IRA situation.

        My main problem is that housing is way too expensive for me (gets a lot worse if you have no real income = no subsidies and no mortgage) so I’m currently evaluating an exit strategy which might be emigration. Heading for a good talk with the bank next week and see if they have some clever suggestions ;)

        Anyway, in most developed countries you can be sure that the government is going to grab most of your money even before you retire, unless you are in the 0.1%.

        • Old-school
          Nov 24, 2019 at 8:29 am

          Your situation sounds horrible. Maybe there are places that want you. We have the advantage that states must compete for US citizens. It leads to a lot of loopholes.

          One is some people decide it’s cheaper to wander around country in an RV. South Dakota actively entices these people because they are trying to increase population and have one day residency requirement. South Dakota is no income tax state I believe. We have a few such states. These people wander around out west and can stay for 2 weeks free on national park service land. I have seen little old ladies doing it on social security check just above $500 per month

        • nhz
          Nov 24, 2019 at 11:52 am

          @ Old-school:
          my situation isn’t horrible, yet ;) It’s mostly that future prospects are bad. This hurts because I have paid millions in taxes over the years (mainly through my business) and never gotten anything back from the government; and by the time I’m entitled to retirement benefits there might be nothing left. Clearly this is the wrong country for me, but if you are getting old emigrating doesn’t look like a great option.

          The US situation with competing states has its advantages in such a case. I can move to other EU countries that have cheaper housing or no wealth tax, but in reality this isn’t so easy because – in addition to language problems – most of them favor their natives and make things difficult for new arrivals so often you replace one problem with another problem. Cheap housing and low living expenses still exist in remote corners of Hungary, Spain, Portugal etc. but it’s far more difficult to adapt there than moving from one state to another in the US. I know an adventurous older lady who went to Hungary, bought a house in the country for just 10K and lives the good life on Dutch social security checks. But I guess I would get bored pretty quickly in such a remote corner.

        • Old-school
          Nov 25, 2019 at 12:07 am

          Sometimes I get stuck on solving my financial problems because my knowledge is somewhat limited. Sometimes specialized tax attorneys can come up with solutions we could never think of using trusts and the like.

          I was lucky in the US we have some exceptions on our retirement accounts. I was able to withdraw my funds at around 50 under a life expectancy formula which worked out to about 3.5% of funds per year without penalty and hardly any taxes. I didn’t have that much but was ready to slow down before I keeled over.

        • Cashboy
          Nov 26, 2019 at 6:02 pm

          I launder money for clients for a living. The occupational name is Tax Accountant.

          My conclusion for the last 20 years is to make sure you have no assets on your personal balance sheet.
          The reason being in the western world:
          1) There will have to be tax on capital in the future (Switzerland is about 0.2% per annum).
          2) State Pensions will be “means tested” in the future. i.e. if you have capital or any other source of income, that will be deducted from the state pension.
          3) If you have capital and when old and end up in a nursing home in the Uk, you will have the costs deducted from your capital when you die.
          4) Inheritance Tax is 40% on your estate value of £325,000 in the UK. Average value of a house is £218,000 in the UK. I read that only 4% of people that die are subject to Inheritance Tax in the UK.

          The elite pay little tax (Blair, Bill Gates, Bezo, clintons) all use “foundations” to keep their wealth off their personal balance sheet. If you ask what you average person understands as a “foundation” they believe it is a charity fund of a philanthropist.

          The streetwise simple way is to keep your assets in a UK limited company with signed blank undated share certificates.
          However there has to be trust in people and that is something I have seen disappear at an exponential rate over the last 20 years.
          It is easier to transfer shares of a private limited company (no stamp duty in the UK) than to transfer property, change bank accounts etc.

  4. Joe
    Nov 22, 2019 at 3:21 pm

    Wolf,
    Since we all are in the same boat leaking…
    Here is an interesting article on how Airbnb has effected this housing bubble.
    https://www.howestreet.com/2019/11/shared-stupidity/
    It is a worldwide company helping generate a worldwide problem.

    • Pinto
      Nov 24, 2019 at 7:31 am

      My dear Joe,
      It’s called peak stupidity or call it democracy of the stupids.

      I’m from Oporto, Portugal and tourism here is booming right now, so even on the scariest, the ugliest are full of tourists/airbnbs.

      But I guess they don’t post on Instagram the shitholes they’re sleeping in, they just go to fancy hotels and restaurants have a simple coffee and take the “selfie” that will enhance their score at Instagram.

      I can tell they have no money other than plain coffee.

      We live in a make believe society.

      • nhz
        Nov 25, 2019 at 4:11 am

        Same story in my remote corner of the Netherlands. The Airbnb guests hardly spend money (apart from money for drugs …) but cause lots of trouble for the neighbors, besides driving up home prices and rents. Before you know it the city turns into a kind of dismal Disneyland and becomes unlivable. Even in Amsterdam some of the politicians and burocrats are now starting to realize that encouraging this kind of tourism has its bad side apart from the huge boon for property owners, the drugs industry and a few other fake businesses. Of course, it’s too late now to do something about it now so a good time to come clean for those responsible ;(

  5. HowNow
    Nov 22, 2019 at 3:56 pm

    Thank you, Nick, for this extraordinary report! Bottom line: it’s really frightening. Sounds like the negative-rate experiment is a failure and may bring the whole system down.

  6. 2banana
    Nov 22, 2019 at 4:15 pm

    Are german politicians still calling for millions of more “refugees” to works jobs that the native germans can’t fill?

    “If the economy’s slowdown turns into a downturn, as the Bundesbank fears…”

    • nhz
      Nov 22, 2019 at 4:23 pm

      Probably they are calling for “refugees” that will fill the homes that the Germans cannot afford (paid by the taxpayer, of course) just like in Netherlands. Which helps to drive up RE prices even further, which is great :)

      As to those jobs, I think on last count 96% of “refugees” where still without a real job one year after getting official status (plus a home etc.). In my country most of them don’t even bother to learn the language, let alone look for a job and Germany is probably similar. Sad really that the German economy is ignoring all these top level engineers, pilots and heart surgeons ;(

      • Unamused
        Nov 22, 2019 at 6:19 pm

        I feel badly for refugees. Through no fault of their own they’re driven out of their homes and may never be able to return. They don’t speak the language, they don’t understand the culture, it’s hard for them to get jobs, they have little opportunity to improve their lot, and it seems like everybody hates them. Meanwhile their children are missing, or their parents, or their siblings, or their elderly, and nobody can tell them where they are. In some places their children are taken away from them by the thousands and put in cages to be sold off to the gypsies, or worse, evangelicals.

        They’re traumatised, and many of the children will be traumatised for life. Wouldn’t you be?

        The world’s more full of weeping than you can understand.

        • Zantetsu
          Nov 23, 2019 at 12:26 pm

          And yet, their lives are better as refugees than they would have been had they stayed in their home country, otherwise they would have stayed.

          So the real tragedy is that some countries are so awful as to produce this sad situation.

      • Xabier
        Nov 23, 2019 at 7:13 am

        Same in Spain: the unemployment rate for migrants even after years of settlement is 45-100% (the 100% are the gypsies, say no more….); but they keep many NGO’s, etc, busy working on their ‘insertion’ and serve to boost housing demand and so on.

        On the other hand, an Iraqi friend who lost her home in Baghdad, for ever, is now working her backside off in Los Angeles for a major US company: hugely talented and driven, she is an asset to any country lucky enough to have her.

  7. Saltcreep
    Nov 22, 2019 at 6:17 pm

    German workers and savers are being monetarily abused. I’d say it’s no wonder at all that German private purchasers are net buyers of gold to the tune of almost 200 tons per year.

    • Old-school
      Nov 23, 2019 at 4:45 pm

      There is a market for labor and savings. If the worker is too heavily taxed and his savings too heavily repressed he can withdraw from the system. If just 5 – 10% do this the system will collapse.

    • Gershom
      Nov 23, 2019 at 10:51 pm

      German workers and savers are being monetarily abused.

      The German sheeple elected globalist quislings like Merkel and her CDU. They purely and simply deserve everything that’s happening to them.

  8. Petunia
    Nov 22, 2019 at 6:49 pm

    I recently heard someone commenting on the German banks having sold large amounts of bail-in-able bonds. I think they might be Coco Bonds. If this is the case, they can call them in anytime and they go to zero, so no need to go negative, depending on how many are out there and how desperate they get.

    • Old-school
      Nov 24, 2019 at 8:35 am

      I don’t know much about it but German society tends to finance business through banks where in US we tend to finance through stocks and corporate bonds. I think this makes the German banking system less robust than US banking system.

  9. Antipodean
    Nov 22, 2019 at 7:16 pm

    The Banks appear to misread the psychology of savers in trying to force them to spend by lowering interest rates. I believe all it does is make them bunker down. If savers were being given reasonable interest returns on their savings it may well make them feel wealthier and in a less shaky position and more likely to spend.

    • medial axis
      Nov 23, 2019 at 4:03 am

      Yes, a couple saving for a deposit on a house aren’t going to go out and blow all they’ve saved so far just because rates have dropped. No, they’re going to do the exact opposite – save even more, and so spend less.

      I find the very idea that the state, or anybody, thinks it’s a good idea to control what people spend/save via interest rates (or whatever mechanism you like) somewhat disturbing. WTF has it got to do with the state how much we spend or save.

    • nhz
      Nov 23, 2019 at 5:10 am

      Agree, and this has been proven in the past in Europe. But such policy would not benefit the 0.1% …

      On the other side, the current policy makes deadbeat homeowners feel wealthy and I’m sure many of them are spending like there is no tomorrow (just like in 1999 thanks to the booming stockmarket).

    • Xabier
      Nov 23, 2019 at 7:18 am

      We have Stone Age brains, and so will tend to hunker down.

      Trying to force ordinary people to invest ‘adventurously’ or spend is like saying:

      ‘We’re going to take most of that stack of smoked and dried meat carefully stored in the corner of your cave, and make you go out hunting all the time’.

      Unfortunately, economically , it’s not hunting season, and the herds have disappeared……..

      Oh dear, economists just don’t do common sense.

    • Wade M Stout
      Nov 23, 2019 at 4:01 pm

      Absolutely. I think the word is getting around that the 4% rule of thumb withdrawal rate is now the 3%. In all seriousness I think the withdrawal rate for a self managed retirement portfolio is about 3.1% and that is if you don’t screw up on your asset allocations.

    • Gershom
      Nov 23, 2019 at 10:49 pm

      Banks aren’t misreading anything. The central bankers are trying to force retail investors to seek yield in their oligarch accomplices’ rigged speculative casino, where they can be fleeced at will. This is all about transferring the wealth and assets of the 99% to a corrupt and venal .1% in the financial sector through legal, organized fraud.

      • HowNow
        Nov 24, 2019 at 8:53 am

        Conspiracy alert!!!

  10. Nov 23, 2019 at 12:16 am

    Volksbank Furstenfeldbruck weakly denies your charge:

    https://www.vrbank-ffb.de/wir-fuer-sie/ueber-uns/negativzinsen.html

    Sehr geehrte Kundinnen, sehr geehrte Kunden,

    durch eine unvollständige Wiedergabe in verschiedenen Medien ist teilweise der Eindruck entstanden, dass unsere Kunden ab dem ersten Euro Negativzinsen bezahlen müssten. Das Gegenteil ist richtig: Wir sind bemüht unsere Kunden so lange wie irgendwie möglich vor den Auswirkungen der Niedrigzinsen zu bewahren.

    • Zantetsu
      Nov 23, 2019 at 12:29 pm

      Nobody can understand you Gary. Why did you even post that?

      • Massbytes
        Nov 23, 2019 at 5:07 pm

        Google translate:

        Dear customers, dear customers,
        Due to an incomplete reproduction in various media, the impression has sometimes been created that our customers would have to pay negative interest from the first Euro. The opposite is true: we strive to protect our customers from the effects of low interest rates for as long as possible.

      • X-Pat DE
        Nov 24, 2019 at 11:47 am

        Speak for yourself! I can understand every word, having lived in Germany for more than 25 years.

        The German real estate bubble is exclusively restricted to the major cities.
        Buying a house in Germany is also a major undertaking, in that, as a rule, real estate “fees” (5% of the house price) and purchase tax, another 5%, and notary fees (based on the purchase price) are due.
        As a result, back in 1996, I paid DM50k in fees before I’d even started to pay for the house!
        “Up and moving” in Germany is a VERY expensive action and prossibly the reason why many (quite sensibly) rent (which allows for more mobility.

        • nhz
          Nov 25, 2019 at 4:24 am

          Netherlands used to be similar to Germany long ago; until the early nineties there was a 6% transfer tax, around 5% in other fees and in most cases the maximum mortgage was 80-90% (with mortgage rates above 10%!), so you needed significant savings in order to “play”.

          Fast forward to today when transfer tax is 2% (with proposals from politics to lower it to 0% for starters), other fees just 2% and the maximum mortgage is 102%, so you don’t need any money to “buy” a home. You can get a zero-down mortgage at just 1.0% (10-year fixed) or 1.6% (30-year fixed) with free government-sponsored mortgage protection included (= you cannot loose money when you have to sell the home).
          That maximum mortgage is down from 120-200% in the early 2000’s, so buyers are loudly complaining; no more free Porsche or SUV included with every Dutch home!! Netherlands is one of the very few countries in the world where zero-down mortgages are the norm; the whole country is subprime but according to politics the system is rock solid.

          Up and moving has become very easy as long as you have fixed income and the result was one of the biggest housing bubbles in the whole world, right next to modest Germany … I guess I have to call myself lucky that I’m not a German living near the Dutch borders, where Dutch equity locusts are making homes unaffordable for the locals ;(

  11. David Hall
    Nov 23, 2019 at 3:15 am

    The DAX German stock market dividend yield exceeds the 30 yr bund yield.

  12. Ensign_Nemo
    Nov 23, 2019 at 5:54 am

    If interest rates go to zero, or go negative, and there is no reason to expect them to go significantly positive in the foreseeable future, then who can ever retire?

    Every person who wants to retire must save either enough money to survive with an annual loss from inflation, until they die, or else save enough money to survive at 0.5% more than the loss from inflation, until they die.

    This is forcing people to work until they are either kicked out by their company’s mandatory retirement age, or until they can no longer physically perform the job, or until they actually die on the job.

    This then reduces turnover, so young people must wait longer to get jobs, or promotions into positions opened by the retirement of older people.

    Young people then can’t afford to start families, or at the very least lack confidence that they will be able to afford any children for the next twenty years.

    This then reduces the birthrate. Right now the total fertility rate – the number of kids per woman per lifetime – in the USA is about 1.73. It needs to be about 2.1 to have zero population growth. We are creating babies at a rate that’s about 18% below ZPG. It’s even worse for certain ethnic groups – for whites it’s about 1.6665, which is almost 21% below replacement levels.

    https://www.cdc.gov/nchs/data/nvsr/nvsr68/nvsr68_01-508.pdf

    https://www.cdc.gov/nchs/data/vsrr/vsrr-007-508.pdf

    This is NOT news that the MSM wants you to read. They are remarkably silent about the impending depopulation of the ethnic groups currently inhabiting the USA.

    When people rant that debt is borrowing from the future to pay for the present, they are more correct than they realize. Our national economic policies are wiping out about a fifth of the babies we need to simply have ZPG, much less grow our population organically.

    I recently heard a truck driver state that her 27 year old son is getting a vasectomy. That is, in effect, a huge vote of no-confidence in the future of the nation.

    Current trends are showing that this will get worse and worse, until something changes drastically.

    We are killing the real economy, and actually shrinking the native population, in order to socialize losses by the 1% over the past ten years since the 2009 financial crisis. They keep the profits, we suffer the losses, and it’s so bad now that the population is no longer replacing itself.

  13. michael earussi
    Nov 23, 2019 at 1:08 pm

    What’s to keep Europeans from having bank accounts in other countries that don’t gave neg interest rates?

    • nhz
      Nov 24, 2019 at 6:31 am

      In that case you have currency exchange risk and often weaker depositor protection (bank default is a real risk nowadays). Again, the bigger problem in most EU countries is inflation and/or wealth taxes, as long as interest rates are only very mildly negative it doesn’t make sense to move the money. Just the cost of moving your money abroad can be higher than the yearly NIRP tax and next year conditions could be different again.

      It’s actually pretty easy to start saving in another Eurozone country and get a bit better rate. But you can bet that an EU bank paying 1-1.5% (which is about the max currently) is risky business despite the official depositor protection. Not worth the risk to me and apparently not to most other savers either. When rates ever get seriously negative it becomes another story and I can imagine e.g. Italy boosting their financial position by forbidding negative savings rates and getting all the savings from Northern Europe, if miss Christine von Havenstein gets her wish of pushing savings rates deeply negative.

  14. timbers
    Nov 23, 2019 at 3:55 pm

    Let the central bankers practice what they preach and impose on others: Negative Earnings (paycheck). The salary paid to central bankers shall henceforth be negative starting at -100,000 Eros and down per year depending on rank.

  15. timbers
    Nov 23, 2019 at 3:59 pm

    If they complain about their negative salary we can tell they should just be grateful to have a job, they don’t need savings.

  16. Gershom
    Nov 23, 2019 at 10:45 pm

    Germans of all people should know what happens when you let your currency be debased by reckless central bankers. Yet for ten years docile German taxpayers have let the ECB and EU put them on the hook for the huge, non-performing loans made to the PIIGS, and they’ve let Draghi do “whatever it takes” to try to print the Euzozone’s way to a debt-fueled prosperity. They, like us, are well down the road to Weimar 2.0 thanks to the deranged money printing by the central bankers.

    • nhz
      Nov 24, 2019 at 6:37 am

      I think many Germans and a smaller group in Netherlands and Finland understand, but they are powerless to do something about it; they have been sold out by their politicians. The clear warnings have been there for over ten years e.g. from Hans-Werner Sinn and many others. But most bankers, politicians and career burocrats are aligned with the globalist / European dream (nightmare) and not with the people of Germany :(

      • Old-school
        Nov 24, 2019 at 9:12 am

        I am convinced 100% that the purpose of a central bank is to ensure the government will always be funded even if you have to use a cart full of money to buy your bread.

  17. Old-school
    Nov 24, 2019 at 8:53 am

    Governments are dishonest with money all the time. When I was about 10 years old my dad was church treasurer. Every sunday night they would count all the money and record everyone’s giving in a ledger. I think it was 1965 when silver coins were replaced by silver clad. I remember my uneducated dad knowing that government was screwing citizens. He would quickly check each coin to see if it was silver or silver clad. Ones that were true silver he would replace with a silver clad coin before it was deposited at the bank.

    • nhz
      Nov 24, 2019 at 12:03 pm

      I remember that too from when I was very young; quickly after that the Dutch silver guilders (that had existed for centuries, in slightly different form) were removed from circulation.

      Over the last 10 years our politicians and bankers have come up with a series of measures to make access to hard money very difficult. In the early 2000’s you could still have a gold savings account tied to real gold in a bank vault, with the possibility of withdrawing the physical. That was banned in 2008 and now we cannot even invest in Gold stock funds etc. in Europe because they are “not suitable for consumers” (too risky, but unlike speculating in stock market unicorns). Opening foreign gold accounts draws the attention of the tax office and fraud authorities and the massive paperwork required will discourage many. And you never know what there next move is going to be, I fully expect some kind of official ban or punishing tax on gold / gold stocks in the future.

    • NBay
      Nov 24, 2019 at 5:05 pm

      By 10 I had both that and Santa Claus figured out. My Sunday school quarter went for candy….the store didn’t care. Kids got a pass in big peoples church, but I never knew they kept track of it.

  18. Julio
    Nov 24, 2019 at 12:42 pm

    Wow. No mention in the article of gold as an alternative to negative savings rates. Only two mentions in the (57) comments… ‘nhz’ being the most informative. Wow!

    People need to wake the hell up and re-learn some tried and true methods of protecting their families from being abused by a certain elite cohort/class of sociopathic parasites.

    “In such a world of conflict, a world of victims and executioners, it is the job of thinking people, as Albert Camus suggested, not to be on the side of the executioners.” — Howard Zinn

    • Cashboy
      Nov 26, 2019 at 5:17 pm

      In Switzerland there are negative interest rates of 0.75% and there is also tax on capital of 0.2% . So the total is 1% with bank charges.
      So basically chf 1,000,000 in a bank costs you chf 10,000.

      As a rough idea chf 1 = US$1

      As a result there is now a two year waiting list for a safe deposit box in a Swiss bank and there is a shortage of chf 1,000 notes.

      • nhz
        Nov 30, 2019 at 10:42 am

        In Netherlands 1M EUR in the bank costs you around 16K EUR due to wealth tax (interest rate very close to zero). In addition there is 2.7% inflation and significant money in the bank has some other costs due to missing out on certain subsidies/fiscal compensations etc. Add it up and the yearly cost of money in the bank is already 4.5% (if you believe the official inflation statistics). And they do that without any NIRP (for now).

        I don’t think there is any run on deposit boxes here but there sure is a run on investment properties for “storing money” – which makes perfect sense, because RE investment in Netherlands has gone up with about 10% almost every year for the last 30 years, easily out-pacing official inflation. I don’t know the real numbers but it would not surprise me if a majority of current homes in my area are now purchased by speculators who park their money there, not by people who plan to live there or owners who want to make some money by renting out the property. Money in a deposit box still has some cost and will never grow. What is wise depends on continuation of the current disastrous money printing but it seems that central banks have no better ideas so who knows … that safe deposit box might be a really bad idea in the long run. While Switzerland probably has much lower inflation than Netherlands, I doubt it will stay that way when the ECB keeps printing money like there is no tomorrow.

  19. WSKJ
    Nov 24, 2019 at 1:45 pm

    Very informative, thx Nick and commenters.

    I recently listened to a biography of Copernicus; as well as his role in astronomical discovery, he was involved (day job) in economic/financial management. At that time (c.1500), there was a problem with dispersed production of coinage: some of the moneyers became known to be alloying silver into the gold coinage, i.e., debasing the coinage.

    Copernicus decided that more-centralized minting could be better supervised, and kept honest. “Bad money drives out good money” was his analysis of the problem. One hasn’t heard this maxim much lately, but it does look as if (nhz, above) the Eurozone has decided that you prevent the “good money problem” by outlawing its possession. Bad money rules !!!

  20. Leser
    Nov 25, 2019 at 7:17 am

    Excellent, objective analysis – thanks Nick for your Europe coverage on this great blog. The high level of comments speaks to the spread and sophistication of the audience – including many from outside the U.S. it seems.

    To anyone scratching their head as to how the Europeans can allow and condone the growing madness: many are frightfully illiterate about financial and economic basics and that stretches across all social strata. Particularly the (upper) middle classers are widely absorbed in Greta Thunberg’s every word and move, the supposed rise of fascism and a host of obscure “concerns” that are completely immaterial to their own lives.

    However, mentioning the risks of ECB policy, the existence of bubbles in most asset and the consequences of a reversion to mean, let alone immigration policy or arguing the corner of Brexit et. al. will get you pitying looks as an obscurantist lost in negativity.

    • nhz
      Nov 26, 2019 at 4:46 am

      I think your observation of Europeans only reflects what mainstream media (both in US and Europe) wants to show you. There is a large group of Europeans who don’t fit this description but they are marginalized by the MSM, just like happens in the US. If you don’t conform to the official “truth” from government and big corporations, you are irrelevant and your opinions are censored not only by the official press but also by Facebook, Google, Twitter etc. And I doubt that financial/economic literacy is worse in Europe, given the very biased economic/financial reporting in the US.

      You can see this reflected in politics in many EU countries where “populist” parties that go against this trend are quickly getting a large share of the votes (sometimes even the most votes) but get marginalized in government and the press anyway thanks to political trickery. These voters are often labeled as “fascist”, “extremist”, “far right”, “anti-migrant” etc. which is often far from the truth. I predict that within a few years in several EU countries such populist parties will have the majority vote, thanks to the elites and MSM continuing to ignore them.

  21. Cashboy
    Nov 27, 2019 at 3:55 pm

    I think that the idea of negative interest could theoretically work.
    Well maybe in the short term against the saver anyway.

    I always understood from old economic books that the bank base interest rate was basically at the same rate of inflation. i.e your bank savings with interest then had the same buying power.
    Inflation is definately not negative ( I would argue that true inflation for you average person is higher than the western governmenst tell us).

    Maybe the government and central banks are making people believe that there is the point in saving money in a bank and go and spend it. That would help the government because they get sales tax (VAT) on sales and people get jobs selling you stuff that helps the GDP.

    However in the longer term, there is going to be huge deficits in state and private pensions.
    I am seeing with my older clients (aged 50 plus) that some of them are getting wealthy for the simple fact that their parents are dying and they are inheriting assets, otherwise they would have nothing.
    However, my client’s children appear to have very little and I don’t see a bright future for them.
    There is a limit (by the number of hours in a day) to the amount of money you can earn on minimum wage and I don’t see corporations having to pay much more thaqn the minimum wage especially going forward. A lot of people and families seem to get state benefits ( housing benefit etc.) to subsidise their ability to live.
    So governments are going to have to go into further deficit (even Germany now) and the central banks are going to have to continue printing.

    • nhz
      Nov 30, 2019 at 10:28 am

      They continue deficit spending and printing money out of thin air in order to make everyone except the 0.1% fully dependent on the banks and the government.

      That’s the plan and it is working out very well for now, even the expected social unrest due to epic wealth inequality has been extremely mild, seems like the herd has been fully domesticated for maximum fleecing. In the Middle Ages some empires were toppled when they raised taxes for their citizens to 10%, nowadays the effective tax rate for private persons is over 50% in many developed countries and over 80% for small business owners. What remained the same compared to the Middle Ages is that governments will fall when they dare to raise taxes to 10%, for multinationals ;(

  22. historicus
    Nov 28, 2019 at 8:08 am

    Negative rates don’t spur economic activity, but they do lead to misallocation of resources and yield searchers going over their skis.

    Negative rates….let me see…..I want to save up to buy a durable good. But I can’t because of the negative rates biting into my savings attempt.
    SO I don’t buy the durable good.
    Economic stimulation? Or, are the negative rates just a way of attempting to save failed governments?

    • nhz
      Nov 30, 2019 at 10:21 am

      on the other side, I guess that many deadbeats who suddenly have access to cheap credit are blowing it on useless over-consumption, including homes that are way to expensive for their income, dirty SUV’s etc.

Comments are closed.