Who could complain about low interest rates? More people than we think...

A few years ago, the unthinkable became a fact. Investors could no longer rely on financial dogmas alone. The economic and financial manuals should be revisited because the principles of finance have been rushed. New policies such as “quantitative easing” (i.e. “QE”) have been invented from scratch. By central banks. As with everything, there are positive and negative consequences for these negative interest rates in EUR. Low rates are not only positive for everyone. The consequences are also indirect and can weigh in the long run. The simplest would seem to start with the "pluses" and benefits.

For example, Governments can or should deleverage, or to be more precise, they should ease debt service (deficits have risen since the crisis, but the cost of debt has fallen thanks to negative rates). All-in increases of debts have been offset by interest reduction. Corporates also took the opportunity to gradually deleverage and restructure their debts. For example, has ALTICE not reduced its cost of debt by $ 700 million a year?

According to the IMF, the lowest level of financing cost has been reached since 1975. Distributed dividends have increased because companies do not want to accumulate cash and destroy value. Some dividend pay-outs are amazing. No shareholder will complain. In terms of taxes, we should also be able to deduct a negative interest (as a charge) and as well as positive interests are taxable. The interest in crypto currencies, which do not generate interest calculation (but do not cost either) has increased, despite a volatility that remains strong. These low rates have the merit of boosting interest for alternative products (funds) and the so-called "dynamic" investment products. Corporates are revisiting their investment policies to allow other asset management instruments. Lastly, these negative rates have allowed many people to acquire their house at a more attractive price. However, these benefits cannot hide the disadvantages that this "abnormal" situation creates.

The “cheap” (interest rate) also has its dangers. These rates are creating a possible real estate bubble that we hope will not burst. We can now borrow at 20 years at less than 1 percent fixed. ALM management has become extremely difficult for private banks with a unilateral "floorage" (at zero) that is not sustainable for banks. Of course, they have floored in the meanwhile all borrowings to ensure minimum margins. This is weakening banks, insurance companies and pension funds. The guaranteed minimum rates, imposed by the States, penalize them. They must seek returns and yields in alternative funds, real estate or "private equity" to offset the shortfall. A mission almost impossible in the medium term. The excess of cash has misstructured the financial management and by the destruction of value it forces to take more risks or to invest in operating assets, which in principle generate positive returns. Private Equity funds (PE's) also see their IRR (internal rate of return) fall while remaining in attractive relative value. PE's “dry powder” continues to increase and is ready for investments. However, it is difficult to find investments at attractive prices, with high multiples. Even cash pools are affected by Transfer Prices. Cash-pooling deposits, for example, should be taxed at negative rates, minus the benefit of belonging to a cash-pool (which should be shared among participants.

IT systems and solutions were not fitted for sub-zero rates and had to be fixed to deal with under-zero rates. Who could have thought about it? We could find another thousand other unfortunate consequences of such depressed EUR rates. The worst of all is a destabilization of the whole banking system. The banks begin to suffer heavily from these persistent negative rates. I am not sure, then, that these rates will not have an effect more perverse than it seems, more haunting, more devious and misleading. The economic textbooks will explain to our grandchildren that more than the crisis or the regulations that followed it, it was the negative rates that destabilized the financial edifice and “vampirized “the centennial economic principles. No, these negative rates are not always "positive", if I may say so. I personally see more "con’s" than "pro’s". They will force us to reconsider our fundamental and founding principles to adapt to a situation that is, to say the least, abnormal. "Time is a killer (or time became murderer)" in terms of interest rates, like the novel by Michel Bussi. I remember a period time was generating value… Time was money but is not anymore.

Fran?ois Masquelier, founder of SimplyTREASURY