It is getting harder and harder to find free parking for large sums of euros. In a battered regional economy, the search for safety has become so desperate that some European investors are willing to pay for the privilege of lending to France, a country dealing with economic stagnation, political gridlock and a tough business climate. Investors might not expect their money to grow in France, but they trust that it won?t disappear.
The yield on French government two-year bonds turned negative on Monday, before edging back into positive territory on Tuesday. Yields on some German debt, another perceived bastion of safety, have been below zero off and on since last month. In addition, banks have been willing to pay their most solid peers to store their money overnight.
This upside-down financial world, in which lenders pay borrowers to take their money, is the result of a decision by the European Central Bank in June. The ECB effectively imposed a penalty on banks that park money in the central bank?s vaults. The radical move was an attempt to stoke the economy by forcing banks to lend to businesses and consumers.
But the strategy has not worked, one reason the central bank is under increasing pressure to try something else when it meets on Thursday, limited though its remaining options might be.
In many cases commercial banks, rather than feeling penalised by the central bank, have decided they would rather pay someone else to keep their money safe. They may not want to take the risk of lending to, for example, an Italian entrepreneur. Or the entrepreneurs may be too pessimistic about their business prospects to want to borrow.
The central bank?s so-called negative deposit rate has rippled through European markets, reinforced by fear that the euro zone economy is in decline and by nervousness about war, not only in Ukraine but also in West Asia.
While some borrowers are benefiting from ultra-low or even negative interest rates, it does not appear that the easy money is reaching the struggling businesses in countries like Spain and Portugal that need it most. That is why the ECB may still need to do more to unlock credit to those countries and avert deflation, a ruinous downward price spiral.
?The negative deposit rate hasn?t worked so far,? said Marie Diron, a senior vice-president at Moody?s Investors Service. ?The intent was that banks would lend on to the economy, and that?s not happening.?
Speculation is rampant that the ECB will soon begin so-called quantitative easing, large-scale bond purchases intended to pump money into the economy. While most analysts do not expect the ECB to announce such a programme on Thursday, the central bank could signal that one is being prepared.
But because one of the goals of quantitative easing is to drive down market interest rates, it is unclear how effective ECB bond buying would be. Market rates are already about as low as they can go.
One widely watched benchmark, known as the euro overnight index average, or Eonia, fell to minus 0.004% last Thursday, the first reading below zero. The rate was most recently at minus 0.013%. Eonia reflects lending between banks that is not secured by collateral, so it is an indicator of how much banks continue to trust one another.
One question, though, is whether banks will bother to lend to one another when there is no return, not simply to cover short-term needs, but to engage in lending meant to support investment banking and commercial loans to businesses and consumers.
The signals so far are mixed. There was a spike in lending volume the day the Eonia rate first fell below zero, to 37.3 billion euros, or about $49 billion. But a day later, volume fell to 19.2 billion euros, according to ECB data. Before the financial crisis began in 2008, Eonia lending sometimes topped 80 billion euros a day.
But banks remain reluctant to lend the cash on to businesses, the banker said. Many borrowers remain too risky.
In addition, banks are behaving cautiously right now as the ECB conducts what is supposed to be the most rigorous scrutiny of their books ever. The central bank is scheduled to complete the comprehensive review of the largest euro zone banks by the end of October. Lending could pick up once banks know where they stand.