European Banks Pay to Lend Cash in Credit-Crunch Reversal

Six years ago, euro-area banks were unwilling to lend to their peers because they didn’t trust them to stay in business long enough to return the cash. Now, for the first time, they are prepared to pay for the privilege for a month.

The rate at which the region’s banks say they see each other lending in euros for one month dropped below zero today, according to the European Money Markets Institute. That’s a turnaround from September 2008, when the rate climbed to a record 5.197 percent as Lehman Brothers Holdings Inc.’s collapse triggered a global recession and froze capital markets.

“We have a liquidity glut in the euro zone,” said Lena Komileva, London-based chief economist at G Plus Economics Ltd., whose clients include central banks. “It’s an extraordinary situation. Borrowers are in a position to get funds at a negative rate which means lenders have to pay to lend.”

The euro interbank offered rate, or Euribor, for such one-month loans dropped to minus 0.002 percent today, EMMI data showed. That’s the first negative reading since Bloomberg started collecting the data in 1998. It has averaged 2.23 percent in that period. The three-month rate fell to a record 0.056 percent today.

ECB Policy

Money-market rates have dropped since the European Central Bank introduced a negative deposit rate in June last year, meaning that commercial lenders were required to pay a fee to park their excess cash overnight with the institution. ECB policy makers cut the deposit rate to minus 0.2 percent in September, which is more expensive than the rate at which peers lend to each other for a month.

Interest rates have dropped as the ECB introduced a range of stimulus measures, including injecting cash via targeted longer-term loans, in an attempt to boost borrowing. The Swiss National Bank last week deepened its negative-rates policy as it exited a three-year cap on the franc’s exchange rate versus the euro. Yields on two-year government notes are less than zero in Germany, Finland, Austria, France, the Netherlands and Belgium. All Swiss sovereign securities with a maturity of up 10-years have negative yields.

“It tells you that investors are betting on a continuing accommodative stance from the major central banks,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “It’s a reflection of the low-rates environment we find ourselves in.”

ECB officials are scheduled to announce their next monetary-policy decision on Jan. 22 amid speculation central-bank President Mario Draghi will introduce a program of buying the region’s sovereign bonds to stave off deflation.

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