European banks real from NIRP

from Casey Research.

Negative interest rates are spreading like a plague.

As you’ve probably heard by now, many interest rates around the world have “gone negative.”

Normally, you earn interest on the money in a savings account. With negative rates, you pay the bank to hold your money. In other words, negative rates turn savings upside down. They basically “tax” the money in your account.

Negative rates were unheard of for most of history. But, as you’re about to see, they’re starting to take over the world.

In this issue, we’ll tell you exactly what’s happening…and what to do about it.

• The European Central Bank (ECB) started using negative rates two years ago…

The Bank of Japan (BOJ) introduced them earlier this year. Denmark, Sweden, and Switzerland have them too.

Today, $10 trillion worth of government bonds pay negative yields. That’s up from $6 trillion in February, a staggering 67% increase in just four months.

The Wall Street Journal reported today that government bond yields in Japan, Germany, and the U.K. have just fallen to record lows.

• Negative rates have even seeped into the corporate bond market…

At least $36 billion worth of corporate bonds have negative rates.

Iconic American businesses Johnson & Johnson (JNJ), General Electric (GE), and Philip Morris (PM) all have bonds trading with negative rates. So if you buy a Johnson & Johnson bond today, you’re essentially paying a fee to lend the company money.

• Central bankers said negative rates would “stimulate” economies…

The idea is that folks will spend more money if you “tax” their savings. According to mainstream economists, this will grow the economy.

It hasn’t worked.

Europe and Japan are both growing at their slowest rates in decades. Their stock markets are also doing poorly. The STOXX Europe 600, which tracks 600 large European stocks, is down 12% over the past year. The Nikkei 225, Japan’s version of the S&P 500, is down 16% since last June.

• Negative rates have backfired…

Folks aren’t spending more money. They’re hoarding cash to avoid paying negative rates.

In Japan, sales of home safes have skyrocketed. According to Business Insider, safe sales are now at the highest level since the 2008 global financial crisis.

Europeans are doing the same thing. Business Insider reported last week:

"Safe sales have shot up through the roof in Europe," said Hickmore [portfolio manager at Aberdeen Asset Management]. "People are taking cash out, and even with security costs, it's better returns than your negative rates. It's crazy, crazy behavior."

• Huge corporations have also gone to extreme lengths to avoid negative rates…

German insurance giant Munich Re recently pulled €10 million ($11 million) from its account with ECB.

Munich Re is the world’s second-biggest “reinsurer.” It insures insurance companies.

Like other large European financial institutions, Munich Re keeps money with the ECB. This arrangement used to make sense. Not anymore.

These days, Munich Re has to pay €4 for every €1,000 it stores with the central bank for a year. That’s because the ECB’s key rate is currently -0.4%. That might not sound like much. But for Munich Re—which oversees about €231 billion—it adds up quickly.

Munich Re put the money it withdrew into other currencies and gold.

• This week, one of Germany’s largest banks said it might soon do the same thing…

Reuters reported on Wednesday:

Commerzbank, one of Germany's biggest lenders, is examining the possibility of hoarding billions of euros in vaults rather than paying a penalty charge for parking it with the European Central Bank.

The company made the announcement one month after it said negative rates were eating into earnings. Its profits fell 52% during the first quarter.

Commerzbank would become the first major European bank to take this step. We don’t think it will be the last. According to the Financial Times, negative interest rates cost German banks €248 million last year.

• Negative rates are eating Europe’s banks alive…

Spanish banking giant BBVA’s (BBVA) profits fell 54% last quarter. First-quarter profits at Deutsche Bank (DB), Germany’s largest bank, were down 58%. Swiss bank UBS’s (UBS) profits plunged 64%.

Last week, Deutsche Bank's CEO said it could continue to struggle as long as negative rates are in place:

In the banking world, we are currently struggling with negative interest rates.

We will struggle more as the effect of those negative interest rates plays out into our deposit books.

European banks are now trading like they’re in a financial crisis. Deutsche Bank’s shares have plunged 41% over the past year, and they’re down another 5% today as we write. BBVA is down 37% since last June. UBS is down 25%.