April 28, 2016
Translated by Kristina Kharlova
Valentin Katasonov is a chairman of Russian Economic Society, editor in chief of “Our Business”, professor at MGIMO University
Question from the editor: Recently The Wall Street Journal again sounded the theme of negative interest rates in Europe. Valentin Yuryevich, is this a new stage in this story?
Katasonov: The subject of negative interest seems to be old, but new stories emerge all the time.
Chronology of this story is approximately as follows: first, after the financial crisis of 2007-2009, Central banks of Denmark and Sweden introduced negative interest rates on deposits, then they were joined by Swiss Central Bank, ECB, Japan… Since February in the United States there is active debate whether the Fed should move into negative interest rates on deposits.
But then it turned out that the process has gone even further: negative interest rates are in effect on active operations of central banks – the so-called “base interest rates”. At least, the negative base rate have already been introduced in Sweden and Denmark.
This is a new phase. Negative interest rates captured the private banking sector: a number of commercial banks in Germany, Switzerland introduced negative interest rate on deposits.
The next phase is the emergence of a large number of debt securities with a negative yield. According to some data, in Europe today, a quarter of all debt securities traded on the market have a negative yield.
And finally, a story, published by the Wall Street Journal about Denmark. They found that some bank customers who received mortgage loans, no longer pay the banks. Moreover, banks are paying the customers. There is a negative interest on mortgage loans. And there are already quite a lot of such cases.
Similar cases, it appears, took place in Germany, starting in 2015. I believe, this is the last phase of the story with negative interest rate – that is, when credit will become negative.
After all, this is a theater of the absurd, surrealism. For several centuries formed the model which we call capitalism, and the cornerstone of this model is loan interest. Now everything is exactly the opposite. Even bankers and eminent economists are at a loss and can’t comprehend this phenomenon. Meanwhile, even Marx in the mid-twentieth century talked about the fact that there is a tendency of the rate of profit to fall. However, Marx believed that interest will tend to zero, even he didn’t have the imagination to picture interest going into the negative.
But this story has another important aspect: if deposits have a negative interest, it triggers a flight from banks. And I see this trend of “going under the water” is accompanied by an active campaign to oust cash from circulation. And this is understandable: if there is no cash, then bank customers will have nowhere to escape.
Another interesting story in this regard: in January a well-known forum in Davos took place, where many meetings were held behind closed doors. And recently, finally, came reports about what was discussed behind closed doors – in particular, the issue of a negative interest. Surprisingly, most panelists didn’t mind to continue “going under water” (to set interest rates below zero). But how to do it, if bank clients start to run? So in parallel it is necessary to solve the issue of abolition, the displacement of cash which will probably be carried out in the next few years.
Europeans are already beginning to understand what is happening. Pensioners, for example, are beginning to protest against it – but not only and not so much because it is inconvenient to use plastic cards – they begin to realize that pension funds “will expire”. And this is just one example – after all, institutional investors work with debt securities, particularly state securities. If today a quarter of all debt securities in Europe went negative – how will pension funds, medical funds, insurance companies operate? In short, this whole financial architecture will begin to crumble, to deteriorate. Capital will begin to melt, and soon only a puddle of water will remain from pension funds.
In general, there are many consequences, and Europe is beginning to be wary, to think and resist. I must say that in Russia there are attempts to push us into a cashless paradise, there are lobbyists. However, there is a group of people (alas, small) who understand this and are trying to counteract.
But there are objective reasons, which will not allow to drive us into cashless heaven in the coming years: first, because the whole mother-Russia must be technically equipped, installing terminals everywhere and equipping merchants – and on Russia’s scale, it is still technically impossible.
At one time, they joked that “bad roads saved Russia”, but now the lack of necessary technical base, God willing, will save Russia from this ‘cashless paradise.