Are negative interest rates really good for treasurers, and for the world economy in general? There are admittedly some benefits, but there are many more drawbacks. Perhaps a return to zero rates would bring the greatest overall benefit.
A few years ago, the unthinkable happened: negative interest rates were introduced. Investors could no longer rely on financial dogmas alone. Financial manuals had to be revisited because financial principles had fundamentally changed. Policies such as Quantitative Easing (QE) were practised by central banks. But what does all this mean in the real world?
There are both positive and negative consequences of these below-zero interest rates for the euro. On the plus side, 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). Corporates were able to take the opportunity to gradually deleverage and restructure their debt. For example, the telecoms and mass media company Altice has been able to reduce its cost of debt by $700m per year.
According to the International Monetary Fund (IMF), costs of financing have reached their lowest level since 1975. Distributed dividends have increased (prior to the Covid-19 crisis), sometimes quite dramatically, or share buy-back programmes have been (re)launched, because companies did not want to accumulate cash and destroy value. No shareholder will complain. The attraction of cryptocurrencies, which do not generate interest (but do not cost either) has increased, despite their volatility. Low rates also generate interest in alternative products (funds) and so-called dynamic investment products – and corporates are revisiting their policies to allow investment in other asset management instruments. Lastly, these negative rates have allowed many people to acquire a house at a more attractive price.