June 14, 2016

More Collateral Damage From Negative Interest Rates

Bankers in the Eurozone’s core nations, in particular Germany, are fast losing patience with the European Central Bank’s rampant forays into the markets and with its ambitions to drive interest rates deeper into the negative. That now includes Germany’s two largest banks, Deutsche Bank and Commerzbank, that are in a coordinated manner and apparently with the backing of the government counterattacking the ECB for its destructive policies.

But it’s one thing for bankers and politicians in one of Europe’s most financially conservative nations to express dismay; it’s quite another when the supposed biggest beneficiaries of ECB policy begin complaining. This is precisely what is happening in the Eurozone’s fourth largest economy, Spain.

The first shot across the bow came from Francisco González, the president of Spain’s second biggest bank, BBVA, who moaned a couple of weeks ago that the ECB’s negative interest rate policy “is killing banks.” Now, a new complaint has emerged, this time from someone who actually has a seat on the ECB’s board: the governor of the Bank of Spain, Luis María Linde.

A Dangerous Dependence

In the latest edition of the Bank of Spain’s Economic Bulletin, Linde cautioned about one of the primary effects of the ECB’s monetary medicine on Spanish households: the growing dependence of Spanish household wealth on the performance of Spain’s stock market. While Linde describes this trend as a “side-effect” of ECB policy, the reality is that pushing savers into riskier investments — in particular, into stocks — was always one of the overarching goals of central banks’ financial repression.

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