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03.09.2014.

The Effects of Negative Interest Rates on European Economies


Negative interest rates here, there, everywhere. What used to be taught as "impossible" in textbook is now a reality throughout the EU. And for the first time it even affects corporate bonds, not just "safe" sovereign ones. Why would anyone lend more than they receive, when they can just hang on to cash? We explain.
 
There is something rotten in the state of Denmark’s financial market; or so it may appear. It was the first European country (in recent years) that started to witness something which wasn’t supposed be possible: negative interest rates. Since then, they have been spreading to other countries’ bonds and earlier this month they made history by affecting even a corporate bond (of Nestle). Why would anyone lend €100 to get back €90 (if at all), when they can just keep the €100 in their wallet?
 
We review the reasons for today’s low interest rates, and show that there are actually good reasons, under the circumstances, for lending at less-than-zero. However, albeit rational and legitimate, negative interest rates do suggest that there is something rotten. Only not in Denmark, but in the Eurozone.
 

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