Friday, 10 April 2015

Borrow at negative interest rates ? What has the world come to



Sometimes the world of finance is utterly incomprehensible to , well, even finance guys. Take for instance what has been happening in Europe.

A few governments in Europe have been issuing short term bonds carrying negative interest rates. That means you pay for the privilege of lending to the government ! Even Spain (the country tottering on a default a couple of years ago) has done this. But these worthies, which include Germany, Austria and Finland as well,  issued only short term debt like this. 

Switzerland has this week taken it to a different level.  It has issued 10 years bonds at negative interest rates. TEN YEAR BONDS. The first country in the world to do so.  And it was handsomely oversubscribed.

So what is happening ? Why would any idiot pay to lend money.  Doesn't it turn everything we know about finance upside down ?

We are in completely uncharted territory and nobody knows what the implications are. Borrowing binges are likely. Will banks now start to charge you for depositing money into your account ?

Part of the  "logic"  of the people buying these negative interest bonds is as follows

  • When interest rates fall, bond prices go up (Its too technical to explain in layman terms, but take this for a fact)
  • They are expecting interest rates in Europe to fall further
  • When that happens the prices of these bonds will rise. They will sell and make a profit !

Of course, in the long run some idiot will be left holding a pile of worthless shit. But finance is all about the short term (alas, becoming extremely short term). Who cares for the sucker in the long run.

Very clever. If only all the fantastic brains who are thinking up incomprehensible ideas in finance were to turn their minds to solving some of the world's more real problems ...........

By the way, if you are in IT, here's a golden opportunity, not unlike Y2K. Bank's IT systems are not tailored to deal with a minus sign in the interest column.  Have to rewrite millions of lines of code ........

12 comments:

  1. brilliant as usual thala..especially kadsila vacheeenga parunga oru twistu..related to the IT part..chaancela...unga blog oru university

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    Replies
    1. Wow Gilsu. What did I do to deserve such high praise ??

      Delete
  2. Agree with Gilsu! My favorite line - "When interest rates fall, bond prices go up (Its too technical to explain in layman terms, but take this for a fact)" :D

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    1. Oh God. In front of a finance girl, I have to cringe at that :)

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  3. இந்த Gils என்ன எப்ப பாத்தாலும் இங்கிலிபீஸ் தமிழ் எழுதறாரு?
    சும்மா தலை தலை சொல்லி Ramesh மண்டை வீங்கி போச்சு ... ஹிஹிஹி

    As for the negative interest rate and bond, ahem, there are a lot more four letter words that I would like to use than the one you have ;)

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    Replies
    1. My God - that's too much Tamil and finished your quota for a full year !!

      I am a polite guy, didn't you know ?:)

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  4. rotfl..sriram sir..as a member of all india Ramesh rasigar manram we take serious objection to this..our manram has branches all over the world :) so u the be ushaar :D:D

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  5. Could it be a flight to safety? Though I am a non-finance guy I have come to respect the signalling provided by data. Negative yields means money is safer with the borrower and I will pay for the privilege. The fact that Switzerland can issue a 10 year bond only speaks volumes for the impeccable reputation that country still enjoys notwithstanding the steady erosion of its famed financial secrecy laws. My -$0.02 worth.

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    1. Well, a little bit of that, but if it was just that you could bury the gold in your backyard. Yes, only Switzerland , or maybe Germany, can issue such 10 year bonds, but short term bonds were sold by even Spain !!!!

      By the way, you are a finance guy you bum :)

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  6. If this can help EU sustain and eventually overcomw the crisis, i am all for it. I am sure there are safety nets built around this else no one would invest.... By the way the world of finance isane. Sometimes i think what i learnt in MBA is all crap.... People are ingenous when they want to make money and no rule is the only rule they follow. EU has to remain relevant for it to be some alternate to US

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    1. That's precisely the danger Sanjay - because interest rates are at such low levels, European governments will borrow their way out of the immediate trouble rather than take the bitter pill of balancing their budgets. Someday the borrowing has to be repaid. You cannot run deficits for ever, not grow and hope to remain alive.

      Yes indeed people are ingenious when it comes to money and no rules can curtail greed.

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