Is the end nigh for the Euro? [vol. 3]
Discussion
DJRC said:
turbobloke said:
DJRC said:
turbobloke said:
DJRC said:
The constant f
king pessimism
There sure are reasons for optimism, given the UK is outside the EZ. And if Miliband is the next PM some of us including your good self no doubt will make a bigger buck. Even so I'd rather trouser a bit less with a new Tory government and eventually a new Tory leader.king pessimismYou're talking rubbish presumably for the effect and to disagree for the sake of it - old habits etc.
Outside the EZ the UK economy is growing at a faster rate, wages are on the up, people and businesses are starting to spend more. If you'd prefer to trade from a position inside the EZ with overall conditions as they are, then with free movement of labour you can do just that, others are well-placed in the UK so there are grounds for optimism.
Party politics is part of what generates optimism and pessimism on the domestic front, maybe you forgot you mentioned pessimism (see above).
Miliband is likely to tax more, but also borrow more and spend more. Some of us do reasonably well in business terms under any flavour of politician but particularly so when there's more money around - if none of that applies to you then fair enough you may see that as not making sense but you'd still be wrong.
You could however have shown how what I had posted was wrong, but not just for you. Try swinging rather than carping
All is well in the Eurozone - Cyprus lifts Capital Controls ....
http://www.bbc.co.uk/news/world-europe-32194092
http://www.bbc.co.uk/news/world-europe-32194092
LongQ said:
All is well in the Eurozone - Cyprus lifts Capital Controls ....
http://www.bbc.co.uk/news/world-europe-32194092
Aye. After tough times for those not exactly dependent on the State. Deposits worth more than €100,000 in the largest bank, Bank of Cyprus, have already been seized (it says at the link). There was also this kind of thing.http://www.bbc.co.uk/news/world-europe-32194092
Thank heavens the EU and EZ are doing so well now. Chin up!
turbobloke said:
Aye. After tough times for those not exactly dependent on the State. Deposits worth more than €100,000 in the largest bank, Bank of Cyprus, have already been seized (it says at the link). There was also this kind of thing.
Thank heavens the EU and EZ are doing so well now. Chin up!
Eeek!Thank heavens the EU and EZ are doing so well now. Chin up!
The nice thing about capital controls is they come out of nowhere, so gone today, back tomorrow.
Dave
Mr Whippy said:
turbobloke said:
Aye. After tough times for those not exactly dependent on the State. Deposits worth more than €100,000 in the largest bank, Bank of Cyprus, have already been seized (it says at the link). There was also this kind of thing.
Thank heavens the EU and EZ are doing so well now. Chin up!
Eeek!Thank heavens the EU and EZ are doing so well now. Chin up!
The nice thing about capital controls is they come out of nowhere, so gone today, back tomorrow.
Dave
It's only other people's money.
gruffalo said:
How to make friends and influence people. Or perhaps not.rovermorris999 said:
gruffalo said:
How to make friends and influence people. Or perhaps not.As others have said on here repeatedly the actual current and stated policies of Syriza are making the Greek economy less comepetative not more competative. Increasing pensions to Greek citizens. Offering higher wage rates etc. Madness really and I presume that this latest brainwave (sic) is yet another attempt by Syriza to put pressure on the EU and Gemany to pay for the failure of the Greek economy. Presumably their intention really is to keep Greece going as it is. Which cannot be done unless someone pays off the Greek debts. These modern Socialists certainly have principles! Ducking and diving and finally turning to blackmail in their efforts to endure their careers continue. Not good at all.
Virtually all of Europe suffered enorrmously in the Second World War. Germany has in fact already compensated the Greek nation for these activities and indeed many other nations. The UK probably lost more than any other nation in WWII by holding up the German advances long enough for Roosevelte to bring tte USA into WWII with the Japanese making the fundamental error of bombing the USA, making their involvement certain. Huge support from our Commonwealth throughout of course.
Personally I think that this all happened a very long time ago and realistically this nonsense from Greece will fizzle out in time. Just wide boys trying it on IMO. Whether the EU will react is a moot point? Just underlines the desperation that the Greek government is steadily descending into IMO. This is going to end in one way. Greece will inevitably default because Greece is already wholly insolvent and steadily getting more and more insolvent with every week this nonsense continues.
Ironically Germany will pick up by far the largest part of the costs of the default of Greece anyway, irrespective of such nonsence clains by Greece. Germany has the strongest economy in Europe and the Eurozone countries will pick up this cost when Greece defauts. Of which , inevitably the Lions share will fall on Germany.
Really quite difficult to extrapolate all the consequences of all of this to the EU as a concept as yet. I can see an awful kerfuffle once Greece does default and Greece will default. The pathetic efforts of the EU to pretend all is well within this nosense, just will not work with this sort of pantomime between the Sovereign governments within the EU going on. Question of, when, not if, Greece defaults. Greece will default.
Steffan said:
Ironically Germany will pick up by far the largest part of the costs of the default of Greece anyway, irrespective of such nonsence clains by Greece. Germany has the strongest economy in Europe and the Eurozone countries will pick up this cost when Greece defauts. Of which , inevitably the Lions share will fall on Germany.
Really quite difficult to extrapolate all the consequences of all of this to the EU as a concept as yet. I can see an awful kerfuffle once Greece does default and Greece will default. The pathetic efforts of the EU to pretend all is well within this nosense, just will not work with this sort of pantomime between the Sovereign governments within the EU going on. Question of, when, not if, Greece defaults. Greece will default.
Another good post Steffan. I suspect the Germans have a plan A, B ,C, D, E....Really quite difficult to extrapolate all the consequences of all of this to the EU as a concept as yet. I can see an awful kerfuffle once Greece does default and Greece will default. The pathetic efforts of the EU to pretend all is well within this nosense, just will not work with this sort of pantomime between the Sovereign governments within the EU going on. Question of, when, not if, Greece defaults. Greece will default.
Surely Uncle Putin is going to save them...
Or is this a ploy to bring the US into the game. Not sure.
Russia can't afford to bankroll Greece, well not for billions anyway, and unless the assets they are supposedly getting for the money are actually worth something then, why the hell would they.
Either, Greece are going to become sanction busters for Russia - possible. Or they are going to sell some of the assets they should have sold anyway as part of the Troika deal.
Makes no sense to me. The Greek government could have create state enterprise (oxymoronic I know) and held say 51 % of the shares, then sold the rest to either Greek taxpayers, or FDI for those assets. Still have owned them, but raised some revenue and hopefully a clearer income stream too.
They aren't doing very well at this.
Or is this a ploy to bring the US into the game. Not sure.
Russia can't afford to bankroll Greece, well not for billions anyway, and unless the assets they are supposedly getting for the money are actually worth something then, why the hell would they.
Either, Greece are going to become sanction busters for Russia - possible. Or they are going to sell some of the assets they should have sold anyway as part of the Troika deal.
Makes no sense to me. The Greek government could have create state enterprise (oxymoronic I know) and held say 51 % of the shares, then sold the rest to either Greek taxpayers, or FDI for those assets. Still have owned them, but raised some revenue and hopefully a clearer income stream too.
They aren't doing very well at this.
Gargamel said:
Surely Uncle Putin is going to save them...
Or is this a ploy to bring the US into the game. Not sure.
Russia can't afford to bankroll Greece, well not for billions anyway, and unless the assets they are supposedly getting for the money are actually worth something then, why the hell would they.
Either, Greece are going to become sanction busters for Russia - possible. Or they are going to sell some of the assets they should have sold anyway as part of the Troika deal.
Makes no sense to me. The Greek government could have create state enterprise (oxymoronic I know) and held say 51 % of the shares, then sold the rest to either Greek taxpayers, or FDI for those assets. Still have owned them, but raised some revenue and hopefully a clearer income stream too.
They aren't doing very well at this.
Indeed as Gargamel says they most certainly are not. Not at all.Or is this a ploy to bring the US into the game. Not sure.
Russia can't afford to bankroll Greece, well not for billions anyway, and unless the assets they are supposedly getting for the money are actually worth something then, why the hell would they.
Either, Greece are going to become sanction busters for Russia - possible. Or they are going to sell some of the assets they should have sold anyway as part of the Troika deal.
Makes no sense to me. The Greek government could have create state enterprise (oxymoronic I know) and held say 51 % of the shares, then sold the rest to either Greek taxpayers, or FDI for those assets. Still have owned them, but raised some revenue and hopefully a clearer income stream too.
They aren't doing very well at this.
The supposed solidarity of the EU seems to me to be distinctly dented. The constant backhand references, from EU politicians and leaders, seeking to force Greece to recognise that fundamental structural changes by the Greek government to the Greek economy are absolutely crucial to even enable the continuing losses and failures current in the Greek economy to even begin to be addressed, are very difficult to imagine. Any suggestions of recovery by Greece or within the Greek economy are currently are just laughable.
In reality it would seem that Syriza are much more interested in inventing financial claims again Germany, without any substance apparently, and rattling the EU cages, with appearing to be cuddling up with Putin and Russia. Hoping that these devices will be sufficient to effect the new deal Greece is seeking from the EU? The EU is of course maintaining that the original bailout terms are non negotiable and that there can be no new deal?
The latest from the BBC suggest that the EU has now confirmed that Greece has just six days to provide the required proposas that will allow the EU to continue the current support operation for Greece.
See: http://www.bbc.com/news/business-32229793
On the basis that the original deal cobbled between the EU and Greece was actually a real and genuine agreement, (which it never appeared to be to many observers including myself) which both parties solemnly agreed to adhere to, it will be interesting to see how the EU and Greece can come to any agreement at all based upon the current ridiculous posturing from both sides that are currently being displayed.
The visible refusal by Syriza to undertake any effective attempts to revive the failing Greek economy, but instead relying on threats and political blackmail and posturing, make it extremely difficult to see how any real progress can be made. Instead of any sensible cuts and reductions in Greek public expenditure, Syruza are offering better wages and pensions to public employees and simpy refusing to honour the agreement. Whilst alienating and haranguing the EU and Germany.
The EU may manage to compound the problem further by inventing some device which enables the EU to continue to bail out Greece in the immediate future. Quite how this matter can continue with the obvious distrust and lack of empathy apparent between Greece and the EU, and with Greece attacking one of the principal cornerstones of the very EU itself, it will be interesting to see. Even if Greece is bailed out by the EU once again, then the next lot of loans requiring immediate repayments from Greece will arise in just a few weeks. Lost causes seems the appropriate phrase to me!
Really not looking sustainable, I think.
Steffan said:
The latest from the BBC suggest that the EU has now confirmed that Greece has just six days to provide the required proposas that will allow the EU to continue the current support operation for Greece.
See: http://www.bbc.com/news/business-32229793
See: http://www.bbc.com/news/business-32229793
An EU official said:
If you take into account weekends and Orthodox Easter, there are only six days left.
Given the situation they really should be willing to work the weekend.David McWilliams reckons the only way to stave off a wave of home evictions in Ireland is a debt for equity swap
DMcW said:
Perhaps the best description of the journey from solvency to bankruptcy comes from Hemingway in his novel The Sun Also Rises. Two characters have just met and are talking intently, each trying to figure out what the other is doing in rural Spain in the 1920s. One of them asks the other, ‘How did you go bankrupt?’ The other responds, ‘Two ways. Gradually, and then suddenly.’
When we look at how countries, firms and individuals go bankrupt, we see that Hemingway got this right.
Initially, it is a gradual process, and the parties tend to be in denial. When dealing with a new reality – a difficulty in meeting a mortgage payment, or a drop in the value of your home – most of us tend to expect that things will return to normal. It takes a while to get our heads around a permanent fall in prices or incomes.
Over time, though, it becomes apparent that there is a monumental shift occurring under our feet. At the point when bankruptcy can no longer be avoided, things move rapidly. The run-up to bankruptcy is a panic situation: the creditor tries to get his hands on as much as possible and the debtor tries to preserve something for himself.
Up to now, the Irish banks that have been bailed out using state capital have been exercising a moratorium on mortgage foreclosures: this was the price exacted in return for the state’s financial infusion. But it can’t go on forever and if AIB is to be sold, and some of the state’s capital recouped, something has to change.
AIB will only be sold if investors are certain that the bad loans have been sorted out and that there are no nasty surprises hidden in the balance sheet. Who would invest in a bank knowing that the new capital invested would merely be filling the hole?
However, the cost of mortgage default or write-downs is eviction, because if banks write down the loans, they will want to sell the underlying assets – the houses – to recoup some cash.
Despite the recovery in the economy, the debt burden hasn’t gone away. While some people are buying new cars at a rate not seen since 2006, many more are still mired in mortgage debts – and this is when interest rates have never been lower. What happens when rates rise?
According to figures the Minister for Finance cited in the Dáil in late 2011, household debt in Ireland is at a breathtaking 140 per cent of GNP. Any upward movement in interest rates will have a devastating impact on people’s ability to repay mortgage debt.
Together with interest rates – a major factor in the trajectory of debt dynamics – defaults and evictions is the attitude of the banks. As long as they don’t insist on getting their money back immediately, there is a chance that a mass mortgage-default episode can be avoided for an extended period. This has come to be known as the “delay-and-pray” strategy. But this is coming to an end.
In order to linger in this state, the bank will need a shareholder who doesn’t care about the value of their investment. This may be possible under government ownership. However, this is not a plausible long-term prospect. Banks must return to profitability at some stage, a necessity that may prove incompatible with the current moratorium on foreclosure.
We have now reached that point, as the state wants to sell the banks. The status quo – in which people can’t afford to pay their mortgages, and the banks can’t afford to write them down – is now not sustainable. The trajectory of bankruptcy – gradually, then suddenly – comes into play.
But is there an alternative to the cycle of default, debt write-down and eviction?
At the height of the Great Depression, US president Roosevelt, recognising that the economy was being held back by debt and understanding that mass eviction was not tenable, stated it was his objective to “relieve the small home owner of the burden of excessive interest and principal payments incurred during the period of higher values and higher earning power”. He embarked on a programme of debt relief, setting up the Home Owners’ Loan Corporation (HOLC) to buy mortgages from banks in exchange for bonds. The government then restructured the mortgages, writing off significant amounts of principal. In all, one million mortgages were restructured.
Starting in 1933, the HOLC bought up mortgages and then waited. Over time, as US conditions improved, and the mortgages started to perform profitably, it sold them back to the banks. Thus, a million Americans, who might otherwise have been kicked out of their homes, got back on track and paid off their loans.
Could we do something similar here? Could we write down and not evict?
Yes we could, but where would the money come from? There can be no more taxpayers’ money going to the banks. So how? What if we used the age-old debt-for-equity mechanism?
Given that house prices rose rapidly during the bubble years, the write-downs might be administered on a sliding scale, with those who bought at the peak getting the biggest break. Let’s imagine an average loan write-down of one third. Picture a mortgage with €300,000 outstanding. The mortgage holder applies for relief, and is accepted. Her mortgage is written-down to €200,000, with repayments restructured accordingly.
This leaves a hole of €100,000 on the balance sheet of the bank. This hole could be filled by giving the bank an equity stake in the house. When the house is sold, a percentage of the proceeds – perhaps matching that of the write-down – would go to the bank. This is a debt-for-equity swap: the bank takes equity and the borrower gets debt relief.
The equity stake would not wholly solve the bank’s new balance-sheet problem, however, because a large proportion of the homes covered by the relief scheme would be in negative equity. The banks would need an infusion of capital from somewhere else in order to keep their balance sheets intact.
Where could this new capital come from? We would have to convince the ECB to accept housing equity as collateral for a massive Irish banking bridging loan.
At the beginning of the debt crisis, when the ECB was behaving like the central bank of a solvent continent, this move would have been impossible. But now with the ECB embarking on QE, anything is possible.
Debt for equity is the only way you can have (1) write-downs without (2) evictions and (3) still sell AIB. If these are the state’s objectives, debt for equity is what it has to do. It is time to get back to the European negotiating table because Hemingway’s iron law of bankruptcy simply can’t be avoided any other way.
When we look at how countries, firms and individuals go bankrupt, we see that Hemingway got this right.
Initially, it is a gradual process, and the parties tend to be in denial. When dealing with a new reality – a difficulty in meeting a mortgage payment, or a drop in the value of your home – most of us tend to expect that things will return to normal. It takes a while to get our heads around a permanent fall in prices or incomes.
Over time, though, it becomes apparent that there is a monumental shift occurring under our feet. At the point when bankruptcy can no longer be avoided, things move rapidly. The run-up to bankruptcy is a panic situation: the creditor tries to get his hands on as much as possible and the debtor tries to preserve something for himself.
Up to now, the Irish banks that have been bailed out using state capital have been exercising a moratorium on mortgage foreclosures: this was the price exacted in return for the state’s financial infusion. But it can’t go on forever and if AIB is to be sold, and some of the state’s capital recouped, something has to change.
AIB will only be sold if investors are certain that the bad loans have been sorted out and that there are no nasty surprises hidden in the balance sheet. Who would invest in a bank knowing that the new capital invested would merely be filling the hole?
However, the cost of mortgage default or write-downs is eviction, because if banks write down the loans, they will want to sell the underlying assets – the houses – to recoup some cash.
Despite the recovery in the economy, the debt burden hasn’t gone away. While some people are buying new cars at a rate not seen since 2006, many more are still mired in mortgage debts – and this is when interest rates have never been lower. What happens when rates rise?
According to figures the Minister for Finance cited in the Dáil in late 2011, household debt in Ireland is at a breathtaking 140 per cent of GNP. Any upward movement in interest rates will have a devastating impact on people’s ability to repay mortgage debt.
Together with interest rates – a major factor in the trajectory of debt dynamics – defaults and evictions is the attitude of the banks. As long as they don’t insist on getting their money back immediately, there is a chance that a mass mortgage-default episode can be avoided for an extended period. This has come to be known as the “delay-and-pray” strategy. But this is coming to an end.
In order to linger in this state, the bank will need a shareholder who doesn’t care about the value of their investment. This may be possible under government ownership. However, this is not a plausible long-term prospect. Banks must return to profitability at some stage, a necessity that may prove incompatible with the current moratorium on foreclosure.
We have now reached that point, as the state wants to sell the banks. The status quo – in which people can’t afford to pay their mortgages, and the banks can’t afford to write them down – is now not sustainable. The trajectory of bankruptcy – gradually, then suddenly – comes into play.
But is there an alternative to the cycle of default, debt write-down and eviction?
At the height of the Great Depression, US president Roosevelt, recognising that the economy was being held back by debt and understanding that mass eviction was not tenable, stated it was his objective to “relieve the small home owner of the burden of excessive interest and principal payments incurred during the period of higher values and higher earning power”. He embarked on a programme of debt relief, setting up the Home Owners’ Loan Corporation (HOLC) to buy mortgages from banks in exchange for bonds. The government then restructured the mortgages, writing off significant amounts of principal. In all, one million mortgages were restructured.
Starting in 1933, the HOLC bought up mortgages and then waited. Over time, as US conditions improved, and the mortgages started to perform profitably, it sold them back to the banks. Thus, a million Americans, who might otherwise have been kicked out of their homes, got back on track and paid off their loans.
Could we do something similar here? Could we write down and not evict?
Yes we could, but where would the money come from? There can be no more taxpayers’ money going to the banks. So how? What if we used the age-old debt-for-equity mechanism?
Given that house prices rose rapidly during the bubble years, the write-downs might be administered on a sliding scale, with those who bought at the peak getting the biggest break. Let’s imagine an average loan write-down of one third. Picture a mortgage with €300,000 outstanding. The mortgage holder applies for relief, and is accepted. Her mortgage is written-down to €200,000, with repayments restructured accordingly.
This leaves a hole of €100,000 on the balance sheet of the bank. This hole could be filled by giving the bank an equity stake in the house. When the house is sold, a percentage of the proceeds – perhaps matching that of the write-down – would go to the bank. This is a debt-for-equity swap: the bank takes equity and the borrower gets debt relief.
The equity stake would not wholly solve the bank’s new balance-sheet problem, however, because a large proportion of the homes covered by the relief scheme would be in negative equity. The banks would need an infusion of capital from somewhere else in order to keep their balance sheets intact.
Where could this new capital come from? We would have to convince the ECB to accept housing equity as collateral for a massive Irish banking bridging loan.
At the beginning of the debt crisis, when the ECB was behaving like the central bank of a solvent continent, this move would have been impossible. But now with the ECB embarking on QE, anything is possible.
Debt for equity is the only way you can have (1) write-downs without (2) evictions and (3) still sell AIB. If these are the state’s objectives, debt for equity is what it has to do. It is time to get back to the European negotiating table because Hemingway’s iron law of bankruptcy simply can’t be avoided any other way.
Moral Hazard is truly a thing of the past judging by that article.
I accept that simple whining, its so unfair. This is a practical solution. and at least the individual home owner loses the 25% of the house they could never afford anyway, but in the end they still have the benefit of the house.
Whereas the prudent saver/homeowner - has nothing to show for their fiscal rectitude.
Art0ir said:
It's certainly not "Free market" but I imagine it may be the pragmatic thing to do. The mortgage figures in Ireland are truly frightening. A wave of evictions would be catastrophic.
Indeed it would. I have been wondering for some time how this conundrum could be sorted out and the same negative equity trap exists in many of the failing sovereign states in the EU around the rim of the Mediterranean. As Gargamel remarks where is the fairness in such possible write downs of negative equity mortgages to the savers and thrifty individuals who have avoided this trap themselves. Clearly there is a real ongoing problem and equally clearly no one has any real idea how resove this in the first place nor indeed any idea how to make such resolution equitable amongst the population of the affected and the unaffected. So much for probity and reasonableness it would seem. ArtDir raises a very difficult financial problem for the affected countries concerned and most particularly for the population therein, and I have yet to see a credible solution expostulated that actually achieves any equitable resolution of this very serious problem. There are a number of such matters still rolling on from the 2007 crisis and I cannot see any resolution as yet.
There has been something of a calm period recently in the question of what on earth are the EU going to cobble together to enable Greece to continue to fail spectacularly within the Euro and not become insolvent. Various concerns expressed in the three media postings below, definitely suggest that all is not well!
See:
http://www.bbc.com/news/world-europe-32217065
http://www.zerohedge.com/news/2015-04-12/greek-neg...
http://www.reuters.com/article/2015/04/12/us-euroz...
The truth is the EU is finding the credibility gap that has built up within the requirements of their support for Greece remaining within the EU, increasingly difficult to bridge. The actions, statements and attitude of the Syriza party currently controlling the Greek negotiations really has stretched the hoops that the EU have been having to jump through, to hold the credibility of supporting Greece and the entire credibility that there will be no defaults on the Greel loans and no exit by Greece from the EU has steadily become, increasingly difficult to achieve.
The EU can at will, without reference to anyone, print Billions of Euros and bail Greece out very very easily. All the control required is vested within the upper echelons of the EU and no one will ask any awkward questions. Regrettably that is no longer true of the relationship between Greece and the EU. Managing to satisfy all the myriad of doubters that are now expressing serious doubts about the reality of the absolutely obvious economic failure of Greece is proving far more difficult to acieve and in fact the EU are not managing this well at all.
The EU still have the cheque book of the ECB which could easily push away these problems. But even the most ardent supporters of the EU desire to hold Greece within the EU, have begun to have a most unpleasant feeling that Syriza and Greece are just taking the P and have no intention of actually conforming with the EU requirements on the bailout agreed solemnly over three yers ago, whatsoever! That is obvious from their attitude and policies.
By Their Deedes Shall Ye Know Them! Is a good old biblical phrase, beloved of Parsons, and highly appropriate in this case. With Syriza deliberately increasing the expenditure of the Greek government and simply not recognising the EU demand for stabaising the economy and offering better pensions, better labour rates, and more jobs to the Greek nation, it is obvious this is never going to actually work. I suspect the EU have actually realised latterly that the position they are holding has become untenable.
There may be a short term extension to get Greece over this current hiatus, but more and more Greek debt requires renewal under the original terms agreed in the original agreement with the EU. One way or another there is no long term in this nonsense. If the EU could actually bring about a change within the actual policies of Syriza then there might be some slight hope. But Syriza are the elected Government of a Sovereign state and clearly Syriza are not going to knuckle under to the EU.
In which case who is paying for all the defaulted loans.?
Yes, correctly guessed, the solvent states within the Euro Zone because they can and Greece cannot and will not. Where does that leave Greece is another question entirely and no one should underestimate the possible repercussions once this collapse starts. But the EU are really not in a position to force the changes required upon Greece and Syriza are not interested. Big changes are coming!
A Borrower But Not a Lender Be
Banks set interest rates on many loans as a small percentage above or below a benchmark rate. In Europe that number is often Euribor, or the euro interbank offered rate. As rates have declined, sometimes to below zero, we find that some banks have landed in a paradoxical position: owing money on loans to borrowers. Lenders are turning to central banks for guidance, but what they are hearing is less than comforting. Portugal’s central bank recently ruled that banks would have to pay interest on existing loans if Euribor plus any additional spread falls below zero. Bankers in Italy said they are awaiting guidance from their local banking association, because loan contracts don’t include any clause on what happens if benchmark rates go below zero. And in Spain at least one bank has already been forced to pay borrowers.
Banks set interest rates on many loans as a small percentage above or below a benchmark rate. In Europe that number is often Euribor, or the euro interbank offered rate. As rates have declined, sometimes to below zero, we find that some banks have landed in a paradoxical position: owing money on loans to borrowers. Lenders are turning to central banks for guidance, but what they are hearing is less than comforting. Portugal’s central bank recently ruled that banks would have to pay interest on existing loans if Euribor plus any additional spread falls below zero. Bankers in Italy said they are awaiting guidance from their local banking association, because loan contracts don’t include any clause on what happens if benchmark rates go below zero. And in Spain at least one bank has already been forced to pay borrowers.
Tumbling interest rates in Europe have put some banks in an inconceivable position: owing money on loans to borrowers.
At least one Spanish bank, Bankinter SA, the country’s seventh-largest lender by market value, has been paying some customers interest on mortgages by deducting that amount from the principal the borrower owes.
The problem is just one of many challenges caused by interest rates falling below zero, known as a negative interest rate. All over Europe, banks are being compelled to rebuild computer programs, update legal documents and redo spreadsheets to account for negative rates.
Interest rates have been falling sharply, in some cases into negative territory, since the European Central Bank last year introduced measures meant to spur the economy in the eurozone, including cutting its own deposit rate. The ECB in March also launched a bond-buying program, driving down yields on eurozone debt in hopes of fostering lending.
In countries such as Spain, Portugal and Italy, the base interest rate used for many loans, especially mortgages, is the euro interbank offered rate, or Euribor. The rate is based on how much it costs European banks to borrow from each other.
Banks set interest rates on many loans as a small percentage above or below a benchmark such as Euribor. As rates have declined, sometimes to below zero, some banks have faced the paradox of paying interest to those who have borrowed money from them.
Lenders, hoping to avoid the expense of having to pay borrowers, are turning to central banks for guidance. But what they are hearing is less than comforting.
Portugal’s central bank recently ruled that banks would have to pay interest on existing loans if Euribor plus any additional spread falls below zero. The central bank, however, said lenders are free to take “precautionary measures” in future contracts. More than 90% of the 2.3 million mortgages outstanding in Portugal have variable rates linked to Euribor.
In Spain, a spokesman for the central bank said it is studying the issue.
The vast majority of Spanish home mortgages have rates that rise and fall tied to 12-month Euribor, said Irene Peña, an economist with Spain’s mortgage association. That rate stands at 0.187%.
Bankers in Italy said they are awaiting guidance from their local banking association, because loan contracts don’t include any clause on what happens if benchmark rates go below zero. About half of the mortgages outstanding in Italy have variable rates, most of them linked to Euribor, according to mortgage broker Mutuionline. Some other countries, such as Germany, often use fixed rates.
Heard on the Street: European Bond Market Defies Logic
In Spain, Bankinter has been forced to deduct some clients’ mortgage principal payments because an interest-rate benchmark tied to Switzerland’s currency has dipped into negative territory.
In January, the Swiss National Bank ended a 3½-year policy of capping the strength of the franc against the euro, sending the Swiss currency soaring against the common currency and U.S. dollar, and cut bank deposit rates into negative territory. The move to end the cap on the franc was designed to relieve pressure on Swiss exporters, many of which are reliant on the eurozone for sales.
During Spain’s home-building frenzy in the middle of the last decade, Bankinter issued mortgages tied to the one-month Swiss franc iteration of the London interbank offered rate, or Libor. At the time, clients were attracted to the offer because Swiss franc Libor was lower than Euribor, the traditional reference for Spanish mortgages.
“I’m going to frame my bank statement, which shows that Bankinter is paying me interest on my mortgage,” said a customer who lives in Madrid. “That’s financial history.”
The client in 2006 took out a roughly €500,000 ($530,000) home mortgage loan based on Swiss franc Libor, plus 0.5 percentage point. Since then, Swiss franc Libor has fallen far enough into negative territory to make his mortgage rate negative.
It is hardly a windfall for this customer, however, because, while Swiss franc Libor has fallen, the Swiss franc itself has risen in value against the euro. That means the value in euros of the total mortgage debt he owes Bankinter has also increased, because that debt is denominated in Swiss francs.
Bankinter has few such mortgages tied to a negative Libor rate, a spokesman said, declining to provide a figure.
An executive at another Spanish bank said the lender in recent months has started to put in place an interest-rate floor on thousands of short-term business loans that are tied to short-term variations of Euribor. Two-month Euribor, is at minus 0.004%. For new loans, the bank is increasing the cushion it charges customers above Euribor.
Hundreds of thousands of additional loans would be affected if medium-term Euribor rates enter negative territory, the executive said. The six-month rate is currently at 0.078%.
Meanwhile, some borrowers in Spain haven’t found relief.
A Madrid judge in November ruled against a client of Banco Santander SA who claimed that Spain’s largest bank inappropriately established a floor on his mortgage in 2013 and therefore owed him money. The plaintiff had taken out a mortgage in 2005 that offered a fixed rate of 2% in the first year and Euribor minus 1.1 percentage points thereafter. The plaintiff said he was now owed money from the bank.
To buttress his argument that a bank shouldn’t have to pay a borrower for a loan, the judge quoted from a June 2014 statement from the Bank of Spain that “a payment in favor of the client in these situations would never apply, but rather the application of an interest rate of zero by the entity.” The Bank of Spain spokesman said the statement cited in the case was issued by the central bank’s customer-complaints service, which typically responds to particular cases. The Bank of Spain hasn’t issued a systemwide decision on how banks should treat negative interest rates, he said.
In Portugal, interest rates on most mortgages are linked to a monthly average of three- and six-month Euribor. Both have been steadily sinking and are hovering just above zero.
João Coelho da Silva, a 53-year-old real-estate agent in Lisbon, has seen his mortgage payments fall from about €450 a month when his loan began in 2008 to €235 now, thanks to a falling three-month Euribor. “With the economy in such a bad state, these monthly savings are more than welcomed,” Mr. da Silva said.
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