Europe is divided among those who pray
by the prolongation of low interest rates and those who put candles to the ECB so that banks and savers breathe. The latest report from the European Systemic Risk Board (ESRB) answers the prayers of the former and ventures at least five more years of low rates that will allow economies to recover sustainably. ESRB experts consider that the pandemic will prolong the period of low interest rates in the European Union that the ECB had designed to respond to the previous crisis and that it has been necessary to prolong and deepen because of the virus.
The report begins with an extensive analysis of how the current environment of low interest rates has been reached due to structural factors such as the aging of the population, the fall in productivity, excess savings and low investment. It then begins a detailed examination of the macro data from the end of 2019, together with the data from the ECB’s Financial Stability Committee and on the basis of that published in 2016. “The impact of the coronavirus may have increased the possibility and persistence of a low interest rate scenario for a long time, making it even lower and for a longer time, “says the ESRB, which estimates a prolongation of low rates of a minimum of five years and a maximum of a decade.
The report also identifies four areas of concern due to low interest rates, which are the profitability of banks and their resilience; the indebtedness of the borrowers, who go into debt more and more to obtain yields; systemic liquidity risks, because the financial system has become more sensitive to market shocks, and insurance companies and pension funds. It should be noted here that the ESRB is skeptical about the sustainability of the business models of insurers and pension funds, which offer guarantees of longer-term profitability because they are under pressure from low interest rates. To face these risks, it points out the need to a far-reaching macroeconomic prudence response, which goes beyond the scope of existing instruments, which are now limited to the banking sector and household measures based on national laws. It considers that current tools “do not provide instruments that can be used to directly address risks related to structural changes in the financial system” and that changes are necessary in macroeconomic prudence policy beyond banking and in activity-based regulation.
The ESRB’s forecast coincides with that made by market analysts, who do not expect the first rate hikes in Frankfurt until at least 2023, given the low levels of inflation expected in the coming months in Europe. The five-year forecast inflation is 2.5% in the EU and 2.5% in the US, levels that are already discounting by the markets and that, although they are above the pre-pandemic marks, they are not dramatic at all. By 2023, the ECB’s estimate for Europe would still be below 2%. Where most complaints are heard about low rates is in Germany, where inflation rebounded in May to 2.5%, the largest year-on-year jump since 2011 and consolidating a strong upward trend that has been solidifying in recent months. The Germans, who historically bet on safe investment products such as life and retirement insurance, government bonds or deposits in Sparkassen, have been irritated by low rates since the time of Mario Draghi and that outrage has been translated into the growing vote for the anti-European party Alternative for Germany (AfD). At the end of 2019, the German Sparkassen were guarding deposits from their clients for a total value of more than 860,000 million euros and, according to the German Federation of Savings Banks (DSGV), the demand for lockable safes has grown in the branches since negative types came into our lives. From 2008 to 2018, German savers lost 123,000 million euros due to low interest rates (4.2% of GDP), but it is also worth mentioning that the German State has benefited 184,000 million euros (6% of GDP) debt reduction.
Before the crisis, Germany paid about 3% of GDP in financial interest. In the first quarter of 2019 the amount fell to 0.7% of GDP. German public debt has been refinanced at negative interest rates for up to 30 years.