Trésorier/Treasurer magazine - N°93 - Apr/May/Jun 2016 - (Page 5)

EDITORIAL - APR What at first seemed to be rather good news turns out to be a nasty headache, which by no means makes everybody happy. Paradoxically, although the return on money market funds may be low (following the overall trend), businesses prefer to invest in potentially more dynamic funds that yield a better return than the negative interest rates that banks offer on deposits. If the cash on your account carries a penalty of at least 0.75%, as it does in some countries, a diversified fund could obviously be attractive. Institutional investors make much use of money market funds as an alternative strategy. They look for a short investment period and a certain amount of security to offset value destruction and loss of capital. Having broken through the mythical zero interest rate barrier, the question is now to know how best to limit this value destruction. The choice open to us is to go for the least negative return. Everything becomes relative. The fact that CFOs have to post losses on deposits should help corporates revisit their investment strategies at last, and perhaps to diversify them by taking a little more risk on board to create a modicum of value rather than to destroy it. The question deserves to be asked. The current situation may perhaps have a beneficial effect, in that it makes companies think about other forms of investment and move away from the traditional bank deposit/money market fund arrangement. No, 2015 will certainly be seen as a major turning point in economic history. One day in the future, we will look back and remember it. N°93 This new reality reveals somewhat depressed financial circumstances and a deflationary environment. Interest rates have been kept artificially low, as a means of financial repression, to lighten debt loads, particularly the debt loads of governments. Let us look at the positive aspect of debt reduction. They say that paying your debts is an enriching experience. If that is true, we are all getting richer. Unfortunately, this never-ending recession is putting heavy pressure on interest rates. It would take major capital expenditure requirements to absorb this low-cost liquidity. The current situation is exceptional and is paralysing the monetary system. Surely we have become enmeshed in the liquidity trap? Consumption and capital expenditure requirements are indifferent to the supply of money and negative interest rates. Will the large-scale quantitative easing (QE) programme produce the desired results? Have we perhaps started too late? This programme consists of discounting (i.e. issuing money) in exchange for sovereign bonds that the ECB acquires from financial institutions. This QE has the effect of raising sovereign bond prices. It overpays for them, which automatically leads to falling yields. Initially, the ECB intended that the banks' cash should be (re)lent to the real economy. Now, it buys back this cash by creating money. This is somewhat like discouraging saving by penalising cash deposits, which is like imposing a loss of purchasing power on cash. In a way, it is like imposing a type of inflation intended to stimulate inflation. Quite a paradox, isn't it? In a normal economic environment, interest is the price of time as agreed between parties. The more time that passes, the more interest you receive in in exchange. The future is nominally dearer, in principle. But with negative - interest rates, time no longer earns any return. In a way, time becomes negative. This would baffle even Einstein. It can have nasty side effects. For instance, equities and property may rise disproportionately in value. Traditional ALM (Asset Liability Management) will tend to disappear with a rising yield curve that prevents the banks from creating value. In this situation, the benefit of cheap deposits will end up by inverting the value creation chain. The medium term effect becomes deleterious and disadvantageous. Economists compare it to a pump flowing back. Even though we may not be entering completely uncharted territory, we have to admit that it will be difficult and tricky to extricate ourselves from it unless we see growth from an upturn in the economy. But yet again - too sharp a rise in interest rates could (again) destabilise the economy. There is certainly nothing straightforward about it. LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE We are now in an era of negative interest rates. We may reasonably expect this situation to last for quite some time. As the economists say, negative interest rates mean imposed inflation. Today we pay the private banks to deposit our money with the ECB. The protection offered by the ECB is seen as so good and so solid that people feel they have to pay to obtain it. The ECB is forcing the banks to lend surplus cash to heavily indebted governments and to companies. And what is there to prevent these negative rates becoming even more negative still? One third of a percent? One half of a percent? That is not beyond the bounds of possibility. We are living in pretty exceptional times. Not exceptional for the Swiss or Japanese, perhaps, but Europe has certainly not seen anything like it for quite some time. The question is knowing whether this abnormal or "subnormal" situation will last or not. / MAY / JUNE 2016 Finding the positive amongst the negative François Masquelier, Chairman of ATEL 5

Table of Contents for the Digital Edition of Trésorier/Treasurer magazine - N°93 - Apr/May/Jun 2016

Cover
Table of contents
EDITORIAL
FINANCIAL HIGHLIGHTS Luxembourg Tax News
INTERVIEW David Blair - How should we set up an efficient KYC Process?
FOCUS
IFRS 9: Hedging - Treasurers will love it
From 17 to 16 reLEASE of the new LEASE accounting standard
Block chain - Is this buzz word turning into a reality?
Bank Single Gateway, the Plumbing of Bank Connectivity
FORUM
Geopolitical threats for the year ahead
Treasurers proceed with caution
Des difficultés en série pour les nouveaux entrants
Easing the Burden - Is a global KYC standard needed?
European trade repository of the year
La dette senior Européenne, un regard nouveau sur l'obligataire
CORPORATE FINANCE
Stay connected with cloud treasury technology
From stone age to straight through processing
Differentiators for treasury management systems
Complete securities financing solutions for corporates
A full and balanced "meal" for your retirement?
15 MINUTES WITH FinMetrics
THE FINANCIAL RISK OBSERVATORY
NEWS
LIFE BEYOND NUMBERS

Trésorier/Treasurer magazine - N°93 - Apr/May/Jun 2016