In Denmark You are now Paid to take out a Mortgage

by Jörgen Eriksson on February 2, 2015

“Something is rotten in the state of Denmark”
Shakespeare´s Hamlet, Marcellus to Horatio as they meet on the battlements of the castle

Danish Blues

Danish Blue CheeseI just read the inevitable but shocking news that in Denmark, Nordea Bank is now starting to pay out interest on house mortgage loans, instead of charging interest.

The Eurozone is moving into a state of deflation, that is, the value of money is increasing over time. This is incredibly dangerous from an economics point of view as it will defer investment decisions, slowing the economy down even more, and it will push those with cash to invest outside of the Eurozone in other countries where they can get a good return, so investments for projects will dry up in Europe.

Even though there are lots of investors out there looking for investment opportunities they will look at opportunities in Asia, Africa and elsewhere where they can make money instead of loosing money when investing.

Quantitative Easing

Quantitative EasingAs we have seen in recent news the European Central Bank will start “quantitative easing” , which means printing of money to buy about 60 billion euro of government bonds per _month_ from now. They will do this to push out cash into the Eurozone economy and hopefully it will help to restore about 2% inflation per year, which is what the economy needs to be healthy and provide the right incentives for economic activities.

However there is no guarantee that quantitative easing will work. The ECB can prepare the grounds for more investment and activity but it cannot force consumers to spend or companies to invest.

Negative Depositor Rates

With negative interest rates raging in the Eurozone’s bond markets and over €1.5 trillion in European government bonds trading with negative yields, it has been only a matter of time until negative interest rates would spill over to other debtors, not just Europe’s insolvent governments. 

In the United Kingdom, retail and business customers with over €500,000 on deposit currently “earn” a negative interest rate of 0.25%. In less euphemistic terms, they have to pay 0.25% per annum to the bank for the privilege of handing the bank their hard-earned money or their business cash.

This means, instead of depositing your money in the bank so that the bank can lend it out to businesses and retail customers for all sorts of economically beneficial purposes, you are financially better off hiding it in the basement. Thus cash in bank is being transformed from an income-producing asset to a costly liability.

Central Bank of England

The European Central Bank and the national European Central Banks have  tried a number of ways to kick-start the European economies but with continuing economic stagnation, the Central Banks are now thinking up more imaginative options.

Sweden, Denmark, Switzerland and Japan have all given negative rates of a sort a go recently. Japan has been dabbling in similar stimulus measures for more than two decades. Its “economic miracle” – its post-war boom – was ended by a banking crisis in 1989. It has since built up colossal government debts.

So where are we heading in Europe folks? Further into unchartered waters.

Negative rates in 60 seconds

About Jörgen Eriksson :

Jörgen Eriksson is the founder of Bearing and is the Chairman of the firm since it was created. He has successfully expanded Bearing into covering projects on four continents. He is also Adjunct Professor of Innovation Management at the International University of Monaco and at Universitat Politècnica de Catalunya in Barcelona and he is an active member of the Founders Alliance organisation.

Working with consulting engagements across Bearings practices, he has over the past fifteen years participated in and supervised a large number of client projects, from innovation system development and place development and branding, to merger and acquisition assignments and leading edge research and business development activities for key clients.

His new book, Branding for Hooligans, will be published in 2015. It is about how innovation and branding are key survival factors in our modern times of hyper competitive markets.

Prior to Bearing, he was Director of Europe, Middle East, and Africa for Trema Treasury Management, a technology and consulting services provider, supplying financial software solutions for the global financial industry, Clients included The European Central Bank, Citibank, SEB, South African reserve Bank, Deutsche Bank, Abu Dhabi Investment Authority (ADIA), as well as many other large financial institutions and Fortune 500 companies.

Early in his career Eriksson was educated at the Stockholm School of Economics, where he studied economics, financial economics and philosophy. He then worked in Scandinavian investment banks and also for the Swedish Institute of National Defense Research.

You can contact Jörgen on e-mail jorgen.eriksson@bearing-consulting.com, connect on LinkedIn on http://fr.linkedin.com/pub/jörgen-eriksson/0/38/8a0/ and follow him on twitter on joreri508.

{ 2 comments… read them below or add one }

Parinaz Alabaf February 2, 2015 at 13:06

Thanks Jogen Eriksson,
I enjoy reading you article.

C. Soares February 11, 2015 at 09:52

Dear Mr. Eriksson,

I beg to disagree with your statement “In less euphemistic terms, they have to pay 0.25% per annum to the bank for the privilege of handing the bank their hard-earned money or their business cash.”

In more realistic terms, (depositors) have to pay 0.25% per annum for the privilege of having the bank STORE and GUARD their hard-earned money or their business cash.”

About the option of hiding it in the basement, it comes also with its own storage and security costs. It is a trade-off between a certain loss of 0.25% per annum versus an uncertain loss, e.g. if thieves assault your basement you may loose the whole 100%.

So as everything in banking (or in life) it is about risk management and making individual choices.

Kind regards
CS

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