Better than a bank account?

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The Perils of Paying People to Borrow

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Ever since interest rates started turning negative in Europe, journalists have been looking for people who are being paid to borrow money. To my knowledge, they have so far found two, neither of whom is really enjoying much of a financial gain. Still, their very existence illustrates how central banks' easy-money policies could become a big problem for banks.

The first of the two clients was Eva Christiansen, a Danish sex therapist whom the New York Times turned into a global celebrity in February. Her bank informed her that the interest rate on her small business loan would be -0.0172 percent. It's not quite clear how the rate came to be negative, but it makes a weird kind of economic sense for Christiansen's bank, with the Danish central bank charging 0.75 percent to hold its deposits. Besides, she's not exactly being paid to borrow: The bank charges her fees in excess of what it owes her.

QuickTake Less Than Zero

Today, the Wall Street Journal found another in Spain. The borrower, who is not named in the story, took out a mortgage in 2006, with interest payments pegged to a Swiss franc benchmark rate plus 0.5 percentage point. The benchmark, known as Swiss franc Libor, now stands at negative 0.84 percent, so the lender -- Bankinter, Spain's seventh biggest bank -- must pay 0.34 percent for the privilege of keeping the client. That said, the borrower is probably not jumping for joy: For anyone with a euro-denominated income, January's jump in the Swiss franc's exchange rate would have increased the monthly payment by almost 16 percent.

These cases are so far too rare and exotic to claim that Europe has gone through the financial looking glass. True, thousands of borrowers throughout Europe have loans linked to Euribor or euro and Swiss franc Libor rates, some of which are now in negative territory. Banks, however, have various ways to avoid paying clients for the privilege of lending to them. They can mount legal challenges, and possibly even insert a "zero floor" clause in loan contracts.  The European Central Bank's latest lending survey shows that they're also tightening the terms of new loans.

Even if banks avoid losses on the lending side, though, they still have a problem. If they want to make a profit lending at or near zero interest rates, they'll have to charge depositors to park their money. As a result, depositors might start wondering why they need banks at all, when they could just hold their money in cash. 

Here's how market historian Russell Napier put it recently in his Solid Ground newsletter: 

Any move to banknotes away from deposits creates a run on the banking system. This has not happened. Yet. However, with the vast bulk of ECB purchases of assets still to come, the move to negative nominal interest rates has just begun. At some stage a shift to banknotes will begin and the limits to monetary policy will become much clearer.

The ECB is living on the edge now, allowing banks and their clients to glimpse the abyss. I'm sure it will have the good sense to step back from the brink when necessary. So enjoy the show while it lasts: It may be a once-in-a-lifetime experience, even if any financial winnings from it are short-lived.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net