The policy of negative interest rates (NIRP) looks, at first glance, a paradise for both the population and businesses.

Which of us would refuse a loan at, say, two percent per annum? If you take a mortgage at such a percentage, and even for 30 years, it turns out that buying an apartment will cost much less than renting. It would seem how great it is to live in the West, where mortgages are often issued at such low rates!

Practice, however, has shown that low interest rates worked in the opposite way in the US and Europe, making housing unaffordable for a record high number of citizens.

The “paradox” is explained simply: the lower the rate on loans, the more citizens can spend on apartments. Since there are a limited number of apartments, their prices are rising. Well, as prices rise, middle-income buyers find themselves overboard, since far from every American can afford to buy a sawdust house for a million dollars.

To illustrate the problem, it suffices to mention a couple from San Francisco who semi-legally rent out container cabins to those residents of the city who do not have two or three thousand dollars to rent at least one apartment. For the opportunity to live in a metal container, the unfortunate pay 600 dollars a month.

Kill low interest rates and pension funds: to invest money in safe dollar papers is now possible only at zero percent per annum. This, of course, is not enough for normal functioning, therefore pension funds in the United States now one has to either cut pensions or play gambling, investing, for example, in the bonds of Tajikistan and Ecuador.

However, the worst is the real sector of the economy. It would seem that cheap loans are a businessman's dream: you can quickly expand production and easily close any cash gaps. However, in practice, it turns out the same way as with mortgages: it turns out that cheap loans are good only if you have access to them, but your competitors do not.

The capitalist economy operates through a few simple mechanisms, chief among which is competition. Bad businessmen take losses and leave the market, leaving the best on the playing field: those who make every year a dollar and a dime out of a dollar. Banks should speed up the selection process of the best by providing loans at 6-12% per annum.

This system natural selection worked well in the United States until the turn of the millennium, and the country's economy developed especially well in the early 1980s, when the interest rate on loans jumped up to 20% per annum in places. Unfortunately, after the dot-com crisis, the US Federal Reserve decided to lower interest rates on loans to almost zero, and market mechanisms that had been working for centuries began to wedge.

Imagine two businessmen, John and Bill. John is working normally, getting his few percent of the profits and looking confidently into the future. Bill does not know how to work, he has only losses. At a normal rate on loans, Bill would have gone bankrupt pretty quickly and cleared the market for John. However, now Bill can take out a bank loan at a very low interest rate and ... continue to work at a loss. In two or three years, when the money runs out, take another loan. And then another and another, thereby delaying their bankruptcy to infinity.

Skillful businessman John is forced, willy-nilly, to follow Bill: cut prices below profitability so as not to lose customers in this unhealthy market. As an example, we can point to the American shale oil companies, most of which, at a normal rate on loans, would have gone bankrupt long ago, thereby returning oil prices to a healthy level of $100 or more per barrel.

Let us add to this ugly picture of monopolies and oligopolies, which have been given the opportunity to grow uncontrollably by cheap loans, and the portrait of the disease will, perhaps, be completed.

We observed something similar in the USSR in the 1970s and 80s. The Soviet authorities did not have enough political will to close inefficient enterprises, and they gradually degraded, producing products of lower quality and less demanded by the economy. Hothouse conditions led to a logical result: when, after the collapse of the USSR, domestic industry was thrown into the arena to the capitalist tigers, that first years practically could not offer them worthy resistance.

Exactly the same thing is happening now in the West. Of course, the central banks of the United States and the European Union are well aware that POPS is a dead end, but it is no longer possible to return to healthy capitalist rails. Raising rates to a level of at least 5% per annum is guaranteed to kill a business addicted to cheap loans.

Unfortunately, there is no good solution to this problem. If the USSR had at least a theoretical opportunity to follow the example of China by gently reforming the economy (instead of giving it to the slaughter of pro-American reformers), then our Western friends and partners simply do not have such an opportunity. Over the past 15 years, printing presses have produced so much money that it is unlikely that it will be possible to get out of the crisis without massive bankruptcies and hyperinflation.

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The Russian banking community came up with the idea to introduce negative interest rates on foreign currency deposits. The Central Bank did not support the initiative. As a result, banks may refuse to accept euro deposits from the public.

Why is the Central Bank against

Commenting on its decision, the Central Bank gave two arguments. Firstly, “the practice of setting negative rates exists only in certain countries of the eurozone and for certain transactions”; secondly, it can “lead to the accumulation of large volumes of foreign exchange liquidity outside the banking system”, that is, to the growth of the shadow foreign exchange market.

The Central Bank may have other reasons to object to the introduction of negative rates on client foreign currency, bankers say. “In addition to the business component, there is an image component. Many clients, especially individuals, may take negative rates negatively,” said Andrei Stepanenko, deputy chairman of the board of Raiffeisenbank. Mikhail Matovnikov, chief analyst at Sberbank, agrees that "the appearance of negative rates is a rather serious negative."

The banking community can solve the problem on its own. It is easier for bankers to stop attracting liquidity in euros by removing the corresponding deposits from their product line for individuals, market participants point out. “As for individuals, the way out may be to stop attracting new deposits in euros,” Stepanenko told RBC, adding that Raiffeisenbank is considering such a possibility. In his opinion, other players can choose this strategy as well. As a result, Russians' ability to diversify their savings will shrink.

However, while in the banking community there is no consensus on this matter. Sberbank and Citibank declined to comment on rates plans. “As for VTB24 and the retail business of VTB Bank, there are no plans to adjust the yield on foreign currency deposits in the short term,” said a representative of the VTB Group.

It will be more difficult for banks to go the same way with respect to legal entities. “Good corporate clients are critical for most banks, and no one will refuse them because of losses on borrowed euros. Banks will have to solve this problem by improving the work of their treasuries, ”a manager of one of the top 30 banks in terms of assets told RBC.

In his opinion, the problem did not appear yesterday, but with proper management of liquidity flows, it can be resolved. “Most likely, the appeal of the association to the Central Bank was caused by a surge in liquidity inflows in euros from clients of some specific banks, which they quite reasonably backed up with a reference to the general, not the most simple situation on the market.”

It is possible, RBC's interlocutor notes, that in recent months the situation has been aggravated by the accumulation by Russian companies in their accounts of foreign currency, including euros, to pay for external debts. In the first quarter of 2017, according to the Central Bank, these payments should amount to more than 15 billion in dollar terms.

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On June 5, 2014, the European Central Bank at about 14.45 Latvian time announced that it was reducing all interest rates, including the deposit rate was reduced from 0% to a negative value of -0.10%. Such information caused a stir and even panic among non-experts in the financial markets. What does this interest rate mean and what does it have to do with the subjects of the economy, i.e. to residents and non-banking businesses in Europe, including Latvia, without delving into the subtleties and complexities of regulating macroeconomic processes and the money supply?

The deposit interest rate, which is regulated by the ECB, means the interest rate on deposits that commercial banks create in central bank accounts. Yes, commercial banks can take not only a loan from the central bank, but also put surplus funds on deposit in the same central bank. The higher the interest rate on deposits for commercial banks, the more interested the commercial bank will be to keep funds in the central bank. Why does a commercial bank put its funds on deposit, and does not lend to the population and businesses? In a market economy, no one can force commercial banks to lend to people and businesses. The central bank can create comfortable conditions for commercial banks to lend to the population and businesses through the resale of loans taken from the central bank (of course, at a different price). If the risks are too high, then regardless of the policy of the central bank, commercial banks will not engage in lending to the economy. For example, experts in the US note that the US Federal Reserve's ultra-soft monetary policy is used by commercial banks not to lend to the economy, but to pump up speculative bubbles in financial markets. Another example is that now commercial banks in Latvia are very cautious in lending, and back in 2006-2008, loans were distributed right and left. Therefore, until June, commercial banks could safely hold free cash on deposits with the central bank, receiving a small profit just above zero without any risks.

How to stimulate lending to the economy by commercial banks? One of the non-traditional possibilities mentioned by the head of the ECB is the continued reduction of deposit rates for commercial banks to negative values. This means that with negative deposit rates, a commercial bank will lose part of its money - at the moment in the amount of 0.1% per annum. For example, if a bank deposited 100 million euros for a year, then in a year the central bank will return 100 thousand euros less. Since a commercial bank is not interested in losing money so easily, it will be forced to withdraw its funds from the central bank. From the point of view of the ECB, this should encourage commercial banks to do something with these funds, for example, start lending to the public and businesses. It would be naive to believe that all commercial banks would rush to lend massively at such high risks of insolvency of the population, economic instability, etc. money to another commercial bank at the EURIBOR rate plus or minus, can issue a loan in another country if there is a network of branches abroad, etc.

How will the negative deposit rate affect the deposit rate for households and businesses in Europe and in Latvia as well? In today's conditions, in principle, no way. Although the offer of commercial banks is influenced by the policy of the central bank, it is still independent. A commercial bank will never make negative deposit interest rates for the population and businesses, because this will cause a massive outflow of deposits from the bank (who wants to lose money?), which will provoke, if not bankruptcy, then serious problems for the bank, especially if this bank has no more strong support from the parent bank. Any commercial bank is interested in attracting money from the public for subsequent investment in securities or resale of this money in the form of a loan to other interested parties. The deposit rate for the population depends on many factors (competition among banks, inflation in the Eurozone, the demand of commercial banks for liquidity, the amount of effective demand for loans, etc.) and not primarily on deposit rates for commercial banks. Very often, the deposit rate for households and businesses is at a level slightly above or below inflation. Currently, deposit interest rates are already at a very low level. According to statistics Latvijas Banka average rate on deposits in euros is about 0.39% with annual inflation in the euro area of ​​about 0.49% (as of May). The figure below shows the dynamics of the deposit interest rate for households and businesses in European Union, as well as the dynamics of the ECB deposit rate for banks and inflation over the past 14 years. As can be seen in the figure, the difference between deposit rates for the population and banks is about 1.5-2%.

Source: ECB, Eurostat

Dynamics of the average deposit rate for the population and business, the ECB deposit rate for banks and the inflation rate in the EU for the period from 1999 to 2014, %

Therefore, a negative rate on deposits for commercial banks can be noted by any resident of Europe, including Latvia, only as an amusing fact that says nothing. If we talk about deposit rates for the population and businesses in terms of the level of profitability, then the deposit has never been and will not be a good source of capital increase.

Only investment activity gives higher returns. For example, by taking on certain risks, in the financial markets you can earn from 15% per annum (CFD on shares) to several hundred percent per year in the currency market. If you fulfill some requirements for trading, then you can get an additional bonus from the broker. For example, TeleTrade Europe additionally charges 24% per annum when certain trading conditions are met. Besides this company offers an analytical service and PAMM-accounts, on which you can also receive quite high passive income.

The other day, a user of the Pikabu infotainment community, well-known in Runet, reported that recently in the German bank Solaris it is possible with a negative rate of -5% per annum. That is, a client can take a loan of 1,000 euros, and he will need to repay only 948 euros.

We decided to find out how this is possible and why such loan offers do not surprise anyone in Europe.

Why does the bank issue a loan with a negative rate?

The use of negative interest rates is no longer a novelty in the global economy. Japan was the first country where banks began to “pay extra” to their customers. At the end of the last century, the government faced a prolonged recession, which led to a decrease in consumer prices in the domestic market (deflation). The country's leadership decided to stimulate the economy by increasing public debt and negative interest rates.

Later, this practice began to be used by European countries. In 2012, the National Bank of Denmark set a negative rate on weekly certificates of deposit. At the same time, the European Central Bank began to actively reduce the base interest rate.

In June of this year, the ECB once again set the interest rate at zero and the deposit rate at -0.4%. A similar rate on deposits in Germany. It is this indicator that banks are guided by when setting rates on loans and deposits.

Therefore, the negative rate in the German bank Solaris is natural in the context of the all-European policy of quantitative easing.

It is worth noting that loans with a negative rate are not a general trend of German banks. For example, Noris Bank issues loans at a rate of 2.90%, but can set a negative rate if required.

Solaris, on the other hand, took advantage of the opportunity to attract new customers and obtain their data with the help of a loan at a minus interest rate.

Loan with a negative rate in the German bank Solaris

According to a user who marked up a post about this bank, there is a lot of competition in Germany among credit institutions that find it difficult to find new borrowers.

The vast majority of Germans have an account in the bank where their grandfather and great-grandfather are, he noted.

Therefore, the management of Solaris probably expected to find new customers among young people at the expense of a loan with a negative rate, counting on further cooperation with them.

Have there been real cases when the bank paid its borrower?

In 2016, Hans-Peter Christensen, a Dane who took out a floating-interest mortgage from a local bank, received 249 Danish kroner ($38) from his lender. Then, in the fourth quarter, the deposit rate was -0.0562% (now -0.65%). Along with Christensen, other mortgage borrowers received similar rewards.

And in what other countries can there be a negative interest rate on loans?

In addition to Germany and Denmark, negative rates are now in effect in Sweden, Switzerland and Japan. For example, Switzerland has recently set a deposit rate of -0.65%. However, we were unable to find loan offers with a negative rate on the websites of local banks. Only in May last year, Bloomberg reported that Switzerland's largest bank UBS will set a negative rate on deposits whose account balance exceeds 1 million euros.

In Japan, the deposit rate is -0.069%. We do not know anything about consumer loans with a similar rate, but mortgages in this country are issued at 0.5%.

The lowest rate among the above countries is in Sweden - -1.25%.

So are negative interest rates a good thing?

More likely no than yes. By themselves, negative rates are a consequence of deflation caused by a long recession in the economy. And deflation leads to a fall in aggregate consumer demand, a reduction in the amount of money in the economy and a decrease in the growth of their real value, which reduces the income of producers, forcing them to cut production and lay off workers. As a result, the state budget receives a smaller amount of taxes.

In turn, low interest rates are not attractive to investors, who in such conditions most often transfer their capital to other countries. Thus, it is even easier and more profitable for banks to invest in foreign assets with a higher yield than to lend to the population at a low interest rate within their own country.

In addition, along with consumer goods becoming cheaper, salaries are also becoming cheaper, and the purchasing power of the national currency in foreign countries is also decreasing. At the same time, residents of countries experiencing deflation cannot compensate for the loss in the value of their savings, since deposits in banks also operate with a negative rate.

All these processes unwind a deflationary spiral, which can provoke a high level of unemployment, a reduction in investment and output.

Negative percentage

NEGATIVE INTEREST

(negative interest) A deduction made by a bank or other depository institution for holding a sum of money for a specified period.

Finance. Dictionary. 2nd ed. - M.: "INFRA-M", Publishing house "Ves Mir". Brian Butler, Brian Johnson, Graham Sidwell et al. Osadchaya I.M.. 2000 .

Negative percentage

Negative interest - the interest charged by the bank for the presence of a deposit account, applied to deposits of foreigners in the national currency.
Negative interest is a fiscal measure used to limit the inflow of foreign capital.

In English: negative interest

Synonyms: Negative percentage

English synonyms: interest charge

See also: Bank interest rates

Finam Financial Dictionary.

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