European interest rates go negative as Draghi boosts stock markets

Interest rates Mar15Historians will not look kindly on Mario Draghi, head of the European Central Bank.

They will ask what he thought he was doing, issuing an extra €1tn ($1.05tn) of debt from March 2015, when the Eurozone was already struggling under a dead-weight of government debt:

  • In the big countries, Italy has $47k of debt per person; France $42k, Germany $36k, Spain $30k
  • In smaller countries, Ireland has $60k, Belgium $48k, Austria $39k, Greece $38k, Netherlands $37k
  • Draghi’s QE programme adds a further $3k of debt per person to these already alarming numbers

And this is not the worst result of his policy.  His main impact, as the Bank of England‘s chjart above shows, is that interest rates for European governments are now going negative.

What is a negative interest rate, you may well ask?

The normal rule is that you earn interest when you deposit money with a bank, or lend to a government.  But no longer under Mario Draghi’s regime.  Instead, you pay the government:

  • Germany, Finland and the Netherlands now have negative interest rates out to 2022 – 7 years
  • Denmark and Austria are negative out to 2021: Belgium to 2020, France to 2019; Sweden to 2018
  • The policy has also impacted Switzerland, which borders the Eurozone; its interest rates are negative out to 2025

What does this mean in practice?

Will banks suddenly start lending to companies to develop fabulous new products and services for the New Old 55+ generation – now the fastest growing sector of the population and woefully under-served today?  Of course not.

Draghi’s free cash will instead be used by speculators to make quick profits in financial markets, as the Financial Times headlined on Saturday:

INVESTORS PILE INTO EUROZONE SHARES: ‘Draghi effect’ prompts currency and fund flows

At the same time, the value of the euro is collapsing.  It has fallen 12% versus the US$ since the New Year, and will likely soon be at parity with it.

Thus Mr Draghi is simply repeating the mistake made by the US Federal Reserve with its Quantitative Easing policy from 2009, and by the Bank of Japan with its Abenomics policy since 2013.

One day though, perhaps not too far away, some investors are going to start to worry about how all this debt can be repaid.  And it won’t take them very long, once they start to do their sums, to realise that it can’t be repaid:

  • Ageing populations means lower growth.  Older people already own most of what they need, and their incomes are declining as they enter retirement
  • China’s need to create jobs means it is now exporting deflation around the world
  • Low growth and deflation are a toxic combination for debt, as we note in the new pH report
  • They mean the debt can’t be repaid out of rising incomes, whilst its value is rising every day.

Mr Draghi may have won new friends in the day-trader community with his new policy.  But that is not his job.  As Paul Volcker has warned, his job is to preserve the value of the currency, and the savings of 334m Europeans.

Draghi’s new policy of allowing negative interest rates to become established, instead risks destroying them both.

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