International Forecaster Weekly

Europe Entering Economic Neverland

...just when you think things couldn't get any stranger, signs of total economic insanity continue to trickle out of Europe.

James Corbett | April 22, 2015

We've talked in these pages repeatedly about the topsy-turvy economic bizarro world we now live in, where everything is the result of central bank dictates. In this “new normal” bad news is good news (because it means the central banks are going to swoop in with the next round of funny money fiat injections) and good news is bad news (because it means they might take away the punch bowl). But just when you think things couldn't get any stranger, signs of total economic insanity continue to trickle out of Europe.

    As we reported last year, the ECB cut the deposit rate for banks from 0% to -0.1%. In effect, banks began paying the ECB for the privilege of parking funds in reserve.

    You think that was weird? Well in Denmark earlier this year a series of rate cuts led to a -0.75% deposit rate. This in turn led to the truly bizarre case of some homeowners actually achieving negative rates on their mortgage. That's right, the banks are actually paying customers to borrow from them even as customers with deposits have to pay the banks interest to park their cash!

    Think that's strange? This phenomenon is now spreading in Europe, with Bankinter SA in Spain now confirmed to be paying interest to customers on some mortgages. The Portuguese central bank recently offered guidance confirming lenders in that country would have to follow suit if benchmark rates like the 12-month Euribor and any other spread falls below zero. Bankers in Italy are currently awaiting similar guidance for this unprecedented scenario.

    Think that's strange? The 3-month Euribor is now below zero. It just fell to -0.001%. For those who don't know, the Euro Inter-Bank Offered Rate (Euribor) is a reference rate tracking the average interest rate for inter-bank loans in the Eurozone. This means banks are now being paid to borrow from each other.

    While this might sound like an excellent money-for-nothing opportunity to the average person, the sheer insanity of this situation is setting off alarm bells in the banking world. Combined with the ECB's recently-launched QE-insanity and the very real possibility that there won't be enough bonds for them to buy as they ramp up their trillion dollar bond purchase scheme, some market players are now predicting a freeze-up of the repo market. This will also paradoxically work to scare investors away from Eurozone debt, meaning the ECB is likely (once again) shooting itself in the foot.

    Don't worry, though, the funny money heroin is hitting the markets and having its intended effect...for now. Germany's DAX hit a new record earlier this month. France's CAC is up 20 percent on the year so far.

    But there's an old adage that “What goes up, must come down,” and if negative interest rate mortgages, negative inter-bank rates and negative deposit rates are anything to go by, the going down part probably isn't far behind.