Negative rates are a risk investors have not seen before

It is virtually impossible to predict where the best place to put your money will be

Merryn Somerset Webb


© FT montage; Getty Images



Stocks are overvalued, and US stocks are particularly overvalued. Their prices are unusually high in comparison to sales, earnings, the value of their asset books, and relative to gross domestic product (that last is Warren Buffett’s favourite measure).

So you shouldn’t buy them. That’s hard to argue with. And it is why strategy group GMO’s latest estimate of the probable seven-year returns from stocks is profoundly gloomy: they reckon you will see a negative 3.8 per cent return from large US stocks and a negative 1 per cent return from small US stocks.

Go global and you might see a small positive return. But GMO predicts that you would have to put much of your money into risky emerging market value stocks if you want to see anything that comes close to the long-term average real return from US stocks of 6.5 per cent.

It all seems very straightforward. It isn’t. That is because the world’s most bizarre financial experiment ever, negative interest rates, continues. The European Central Bank currently charges banks minus 0.4 per cent on their deposits. The Swiss National Bank is even more out there, with minus 0.75 per cent.

Negative rates are becoming the norm for institutional deposits — having to see cash on hand as a cost has taken a bit of getting used to, but now passes almost uncommented on in board meetings. The same could be on the way for retail deposits. UBS is introducing a negative rate on large deposits and rivals are likely to follow. Yields on German government bonds are negative across all timeframes. The 10-year UK gilt yield is now below 0.5 per cent for the first time ever. US 10-year yields are not negative, but they are at an all-time low. In total, $16tn worth of government bonds now actively eat your money if you hold them to maturity.

Expect more of the same. Most analysts forecast monetary loosening in the US and the EU in September. Albert Edwards of Société Générale (one of the first to predict all this) says we could consider this to be a massive bond market bubble messing with our sanity. One could also argue that it is entirely normal: why shouldn’t investors pay to have cash stored? They already do so for stocks, classic cars, and art.

Perhaps, as former US Federal Reserve chair Alan Greenspan put it this month: “Zero has no meaning.” Or you could see it as something more terrifying; “an appropriate reaction” to the fact that the next recession will fast turn into a global deflationary bust. That would require a mix of extreme fiscal policy and helicopter money, driving rates down even further.

All this monetary drama can be easily overshadowed by the general political hysteria around the world. The latter is important, of course. The final stage of the Brexit battle matters to the UK: Boris Johnson and Leavers have (just) the upper hand, but hardcore Remainers have done a remarkably good job of foiling the result of the referendum so far. The vote to quit the EU was three years ago; it still hasn’t happened.

We still cannot be sure what to expect; that affects the economy in the short term. You can attribute the 0.5 per cent rise in UK GDP in the first quarter and the 0.2 per cent fall in the second to feverish preparations for the previous deadline for Britain to leave the EU of March 29.

The on-off nature of the US trade war (soon perhaps to be cold war) with China obviously makes a difference, too. A round of reshoring of manufacturing and other activity could conceivably be good for the US in the long term. The transition period might not be.

But these are political events, the likes of which developed countries with sound institutions have seen — and seen off — before. Negative rates are different. Paper money has been around for about 1,000 years. No one has, as far as we know, ever offered negative interest rates on it before. In theory, that makes it the first thing investors should be thinking about. In practice, it also makes it impossible to have any sense of certainty about what to do.

It might mean you should start looking to buy a nice safe: if it costs you to keep your money in the bank, why not save yourself a bit of cash and keep it at home? It might mean that you should buy bond funds. Central banks may be thinking, as the Fed’s Jay Powell suggested this week, about “whether we should expand our toolkit”. In a world overladen with debt and ageing populations, that means yields are going to keep falling and bond prices will rise — at least until inflation is finally unleashed.

It might also mean that you should keep piling into equities, any old equities: if they are the only asset class offering reliable and often rising income then maybe they remain the best asset class there is. There may be some real value around if you ignore the US and much-hyped tech stocks; look for the many equity funds on offer (in the UK at least) yielding 4 to 5 per cent.

However, the key thing to hold on to in our era of surprises is doubt. Too many investors (and definitely too many Twitter users) have an unwarranted level of certainty about too many things. They shouldn’t. Anyone who really thinks they can forecast what will happen over the next year — let alone the next decade — in this new negative yield world, is likely to end up disappointed.


The writer is editor of MoneyWeek

Repo Spike Signals Wrong Kind of Volatility

Wall Street trading desks will suffer as frightened clients retreat

By Telis Demos


Citigroup’s net interest revenue from fixed-income trading was down 4% through the year’s first half. Photo: timothy a. clary/Agence France-Presse/Getty Images 


A wild, mysterious ride in short-term funding markets isn’t good news for Wall Street trading desks.

Big global investment banks have a love-hate relationship with volatility. With the right kind of price swings, or so-called good volatility, clients see opportunities and start making trades. That is helpful to banks with trading operations. But with the bad kind of volatility, clients retreat from trading out of fear.

For Wall Street banks, a key question now is whether recent events—including the oil market’s reaction to the Saudi attack, a rotation from growth to value stocks and a two-day surge in repurchase agreement, or repo, rates—represent the right or wrong kind of volatility.

Wall Street’s typically opaque ways of making money make this hard to figure exactly. In stocks at least, this month’s sectoral rotation likely helped some trading desks.

But in the much bigger fixed-income, commodities and currencies business, things look less rosy. 


For one thing, it is clear that some clients somewhere are in trouble. The timing of the repo spike is noteworthy: When repo rates surge at the end of a quarter, it is often tied to banks trimming balance sheets for regulatory purposes. But this spike came two weeks before quarter-end. That suggests clients or dealers, not banks themselves, are driving the drama.


Corporations and investors have either pulled cash out of the market, helping exacerbate the repo squeeze, or are scrambling for cash to cover immediate needs. That could be related to what happened in oil. In any case, these clients aren’t putting on new positions, and thus aren’t generating revenue for desks.

Secondly, funding costs will likely rise for some desks. Banks have reduced their reliance on short-term funding since the financial crisis, but it is still a factor. In particular, broker dealers not affiliated with deposit-taking banks, including the U.S. operations of some European banks, are facing the prospect of having to fund positions at higher prices.

With trading desks already holding lots of low-yielding paper, this puts further pressure on net interest margins. Net interest revenue in fixed-income trading at Citigroup, the rare bank that gives detail on such results, was already down 4% from a year ago through the first half of the year.

Unlike the last time there was a funding squeeze in the repo market during the financial crisis, banks aren’t in any fundamental danger. And increased volatility in currencies, Treasurys, and commodities markets in this quarter from a year ago can be positive indicators for trading desks.

But some bank executives this month warned that clients remain anxious and said that September activity would determine the quarterly outcome on trading revenue. Events of the past two weeks won’t help make this picture any more appealing when banks report earnings next month.

Federal Reserve sees huge demand for cash after money market ‘shock’

Crunch in short-term borrowing market sends key policy rate above central bank’s target

Adam Samson in London and Joe Rennison in New York



Banks and investors rushed on Wednesday to gobble up $75bn in short-term cash the Federal Reserve made available in a second attempt to steady one of the world’s most important money markets.

Dealers submitted requests for over $80bn in overnight borrowing, exceeding the maximum amount the New York Fed had placed on offer. That amount far exceeded the $53bn demanded when the central bank stepped into the market on Tuesday for the first time in more than a decade.

In a sign of the crunch that has hit the short-term borrowing market, the Fed’s main policy rate, the federal funds rate, has jumped above the central bank’s 2 to 2.25 per cent target. Data released on Wednesday morning showed the rate rose to 2.3 per cent on Tuesday, from 2.25 per cent on Monday and 2.14 per cent at the end of last week.

The central bank has been forced to intervene after a severe imbalance in the so-called repo market sent the cost of borrowing cash overnight, known as the repo rate, surging to a historic peak.

The Fed had not previously used its repurchase agreement auction mechanism outside of small tests since the financial crisis in 2008 and encountered a hiccup on Tuesday as it attempted to open the facility for a large-scale operation.

“US funding markets were shocked this week as a combination of factors reduced the amount of cash available to fund securities positions,” said Alex Roever, head of US rates strategy at JPMorgan Securities, one of the two dozen primary dealers that act as trading counterparties for the Fed.

Analysts said the Fed’s dramatic intervention should be seen as a valve meant to release pressure on the repo market, in which banks and funds provide Treasuries and other securities in exchange for cash in transactions that reverse overnight.

Wednesday’s operation and this week’s market ructions come as policymakers on the rate-setting Federal Open Market Committee are meeting in Washington. The central bank is expected to reduce its main policy rate by a quarter of a percentage point as it seeks to stimulate the economy in face of growing global headwinds.

Highlighting the importance of the repo market to financial stability, Mr Roever said that while the money markets were functioning normally, the sharp rise in the repo rate had reverberated elsewhere, such as the short-term corporate borrowing market known as commercial paper, on Tuesday.

Joseph Abate, a managing director focusing on money markets at Barclays Capital, another primary dealer, said that a combination of “temporary pressures” had struck the crucial portion of the financial system in recent days.

Analysts specifically pointed to corporations pulling billions of dollars out of money market funds, which are typically major providers of cash in repo transactions, ahead of tax deadlines as a key component of the shock. It had been exacerbated, they said, by a flood of Treasuries hitting the market, something that sharpened dealers’ demand for cash via repo transactions.

Banks, which typically step into the repo market, also made less cash available because of a decline over the past several years in their excess reserves, said Mr Roever.

Given the short-term nature of repo transactions, analysts said, the cash being made available by the Fed should not be seen as a loosening of monetary policy or a cumulative injection of cash into the market.

“[The repo] operation says that the Fed is watching the markets and is willing to intervene on a temporary basis if conditions warrant,” said Mr Roever. He said the recent bout of volatility in the repo markets would “almost certainly” be a topic at the FOMC meeting, which concludes on Wednesday.

Money market analysts will also be looking for clues on whether the Fed plans to make the repo auctions a regular occurrence, or whether the bank will take other actions aimed at stabilising the market.

Mr Roever warned that this week’s events may be a “prequel to what could come at year-end when US banks significantly reduce their footprint in the money markets” to manage certain regulatory capital levels.

Debt securitisation rebounds to pre-crash levels

Commercial mortgage securities have bounced back — unlike the residential equivalent

Laurence Fletcher in London


A graphic with no description

A graphic with no description


Parts of Wall Street’s debt securitisation engine are back running at levels not seen since the pre-financial crisis boom.

Data group Dealogic’s indices of US securitisation activity show that issuance of collateralised debt obligations — structured products made up of bundles of bonds and loans — rose above its pre-crisis peak late last year and is currently back close to those levels this year.

The market for commercial mortgage-backed securities has also rebounded strongly since late 2008 and early 2009, when issuance completely seized up in the aftermath of the financial crisis. Activity in the asset class is now some way above its 2007 high.

In contrast, the data show little sign of a significant re-emergence of issuance of residential mortgage-backed securities — packages of US mortgages seen as helping precipitate the financial crisis — or asset-backed securities, both of which are fairly flat compared with 2008.

The data are based on the value of primary market transactions, the number of deals and their share relative to overall debt capital market issuance, equally weighted to form an index.

Tumbling yields on many traditional “safe haven” bonds to ultra-low or negative levels — supported by the European Central Bank’s renewed bond-buying programme announced last week — has forced income-hungry investors into other, riskier assets.

That has helped fuel a resurgence in some areas of securitisation, which involves packaging underlying debt instruments and selling it on to investors. But it has also raised questions as to whether some areas have become overinflated and could pose another threat to financial stability, if prices in the underlying markets start to fall.

As Dealogic’s global head of data science, Paul Sykes, puts it: “Are we in a world where lots of securitisation is fine, or is it a precursor to something worse?”


The End of the Afghan War?

There is no winning in Afghanistan, only perpetual engagement.

By George Friedman       

The U.S. seems to be nearing a withdrawal from Afghanistan. After nearly a year of talks, U.S. and Taliban negotiators have in hand a draft agreement for a peace deal to end the 18-year war. The Trump administration, which has long wanted to withdraw forces from the country, still wants to maintain some combat capability there. Reports over the weekend indicate that administration officials have suggested expanding the CIA’s presence in Afghanistan, but Langley is resisting an increased role for the agency there. The CIA, technically speaking, does not represent combat capability. But practically, it could serve as a liaison to factions opposed to the Taliban, providing tactical information for airstrikes and carrying out a range of strategic actions. This suggests that whatever withdrawal the U.S. is considering is a political one.

The U.S. main force will be withdrawn, but the U.S. will still know what’s going on tactically and will retain the ability to launch selective strikes. Uniformed troops will be replaced by ununiformed officials. This is, of course, certainly not the first time the U.S. has used CIA and special operations forces in collaboration with local forces to manage the situation in a country; the U.S. withdrew from Somalia and Lebanon but retained capabilities there. If we’re to learn anything from those instances, it’s that the level of violence will decline, but there will still be deaths, just with far less publicity.


 
Before the War
In all of this, we need to recall why the United States went into Afghanistan in the first place. On Sept. 10, 2001, the last thing anyone thought would ever happen was a U.S. invasion of Afghanistan. The United States had backed the mujahideen’s insurgency after the Soviet invasion of Afghanistan in 1979, and understood the terrain, the tribal rivalries and the difficulty of operating in that environment. The insurgency turned what the Soviets had expected would be an operation of surgical precision into a decadelong morass. The U.S. may very well have had to go into Afghanistan, but it had no right to be surprised at what happened next.

As the Soviets withdrew from Afghanistan, a complex civil war broke out in which, essentially, the Northern Alliance waged a war of resistance against the rising Taliban. Pakistan, which has long had a major interest in its northwestern neighbor, got involved; its intelligence service factored into the Taliban’s victory in the civil war. And as the Taliban, led by Mullah Mohammed Omar, deepened its control, it gave sanctuary to al-Qaida.

Still, the United States did not see Afghanistan as being of strategic interest. The Americans had come to see Afghanistan not as a prize but as a swamp. Any of its neighbors – from Iran and Pakistan to Tajikistan, Turkmenistan and Uzbekistan and even China – could chew off a piece, but trying to conquer the whole would simply bog you down permanently. Each of these countries’ intelligence services might probe here and there, and deals could be made, but nobody could possibly conquer and occupy the entire country. Even the Taliban at the height of its power could not control it all. From the American point of view, anyone who wanted to replicate the Soviet disaster was welcome to do so.
 
Into the Morass
What U.S. intelligence had missed was not al-Qaida; the U.S. undoubtedly knew its base was in Afghanistan. What it failed to understand was that al-Qaida had a cadre of operatives able to penetrate the U.S., maintain contact with al-Qaida, receive funding and obtain pilot training. That cadre went undetected right up until they executed a spate of planned, simultaneous hijackings and suicide attacks.

The problem for the U.S. was that its intelligence agencies clearly had no idea what else al-Qaida could do, given that the intelligence community did not detect the 9/11 plot. The only way the U.S. saw to disrupt al-Qaida operations was to attack the organization in Afghanistan. Since a full-scale invasion could not be launched in the timeframe imagined, it was the CIA, with its excellent contacts in Afghanistan, that purchased alliances with various groups and, supported by a fairly small force of Marines, conducted the main attack. Osama bin Laden, aware of the force being marshaled, escaped into Pakistan. Al-Qaida command was disrupted but not destroyed.

This was the critical point. Having sent in troops and reinforcements, the U.S. had no clear strategy for Afghanistan. The country was of interest only to the extent that al-Qaida operated from there. The concern, then, became that al-Qaida might return. The CIA, rather than the U.S. military, used its contacts and funds to build up a local force against al-Qaida. To some extent, that narrow operation was a success. But the attempt to occupy Afghanistan made almost no sense. In essence, the U.S. was willingly putting itself in the same position as the Soviets – who had failed.

The fear that al-Qaida would return to Afghanistan was understandable. But al-Qaida was mobile and had a flexible command structure. It didn’t require some massive control center, even for 9/11. To destroy al-Qaida would mean widespread warfare. But the U.S. did not have to occupy countries. As I have argued elsewhere, occupation warfare is the most difficult form of war; even the Nazis, with no limits on brutality, could never defeat Tito’s guerillas.

The defeat of a group like al-Qaida depended on intelligence and special operations forces. The group was built for dispersal because of its sparseness, and at any given time it could operate globally; the occupation of any one country could not destroy al-Qaida. Perhaps the core problem the U.S. had in Afghanistan was not that it forgot the lessons of the Soviet war but that it used the term “invasion” to describe how it dislodged al-Qaida. The U.S. did not disperse al-Qaida; it launched a covert operation that used money to motivate local forces familiar to the United States, backed by U.S. air power. The actual invasion was an attempt to turn sanctuary denial for a terrorist group into a conventional war.

It didn’t work. The U.S. had minimal interest in Afghanistan beyond al-Qaida, and al-Qaida was everywhere and nowhere. The U.S. could not impose its will on Afghanistan no matter how many divisions it brought in. But it was a passionate time in the U.S., and reasonably so. It was also an example of the dangers of passion.

So now we are back to where we began. The military will leave, and the CIA will take over with far more modest goals. The CIA is not going to try to engage in nation-building; rather it will try to maintain the flow of intelligence and carry out covert operations with special operations forces to keep the enemy off balance. As it was in the beginning, so it shall now be again. And, of course, the CIA is resisting. There will be no glory in winning – there is no winning in Afghanistan, only perpetual engagement. But without winning as an option, a much smaller investment is needed.

The Twilight of the Global Order

The recent G7 summit in Biarritz signaled a broader shift in international governance away from constructive cooperation and toward vague discussions and ad hoc solutions. The conclusion of the summit could be a marker of the world order’s future – ending not with a bang, but with a whimper.

Ana Palacio

palacio99_ Dylan Martinez - PoolGetty Images_g7 summit


MADRID – We live in an era of hyperbole, in which gripping accounts of monumental triumphs and devastating disasters take precedence over realistic discussions of incremental progress and gradual erosion. But in international relations, as in anything, crises and breakthroughs are only part of the story; if we fail also to notice less sensational trends, we may well find ourselves in serious trouble – potentially after it is too late to escape.

The recent G7 Summit in Biarritz, France, is a case in point. Despite some positive developments – French President Emmanuel Macron, for example, was praised for keeping his American counterpart, Donald Trump, in check – little was achieved. And, beyond the question of substantive results, the summit’s structure portends a progressive erosion of international cooperation – a slow, steady chipping away at the global order.

It is somewhat ironic that the G7 presages the future, because it is in many ways a relic of the past. Formed in the 1970s, at the height of the Cold War, it was supposed to serve as a forum for the major developed economies: Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

After the fall of the Soviet Union, the G7 continued to shape global governance on issues ranging from debt relief to peace operations and global health. In 1997, the G7 became the G8, with the addition of Russia. Still, the body epitomized an era of Western preeminence in an institutionalized liberal world order in full bloom.

That era is long gone. The 2008 financial crisis hobbled the body’s core members, which, together with the rise of the emerging economies, especially China, meant that the group no longer possessed the critical mass required to guide world affairs.

The larger and more diverse G20, formed in 1999, thus gradually overtook the G8, formally replacing the latter as the world’s permanent international economic forum a decade later. In an increasingly complex and divided global environment, the G20’s flexible policymaking style – including a preference for non-binding commitments – was regarded as more viable than the hard-law methods of older multilateral institutions.

The G8 drifted along as a mere caucus. When Russia’s G8 membership was suspended in 2014 – a response to its invasion of Ukraine and annexation of Crimea – it became even less weighty, though more cohesive, with its members sharing a more consistent worldview. (Some, including Trump, now call for Russia’s reintroduction to the group.)

But even that slight advantage was demolished with Trump’s election in 2016. His administration began attacking allies and rejecting shared rules, norms, and values. The situation reached a nadir at the 2018 G7 Summit in Quebec, where a petulant Trump criticized his host, Canadian Prime Minister Justin Trudeau, and publicly disavowed the summit’s final communiqué as soon as it was issued.

Against that backdrop, this year’s summit in Biarritz elicited great trepidation. With little hope for consensus on any consequential issue, the meeting’s French hosts focused on keeping up appearances, choosing expediency over impact. Goals were kept vague. In fact, Macron announced before the event that there would be no final statement, declaring that “nobody reads communiqués.”

But that decision represented a major loss. Final communiqués are policy documents, providing important signals about significant compromises to the international community. The 2018 declaration, which Trump rejected, was 4,000 words long, identifying a set of shared priorities and common approaches to addressing them.

The Biarritz summit, by contrast, ended with a 250-word statement that was so vague and anodyne as to be all but meaningless. On Iran, for example, G7 leaders could agree only that they “fully share two objectives: to ensure that Iran never acquires nuclear weapons and to foster peace and stability in the region.”

On Hong Kong, they reaffirmed “the existence and importance of the Sino-British Joint Declaration of 1984 on Hong Kong” and called hollowly “for violence to be avoided.” On Ukraine, France and Germany promised to organize a summit “to achieve tangible results.”

To be sure, some positive steps were taken in Biarritz. Iranian Foreign Minister Mohammad Javad Zarif’s surprise appearance created a potential opening for future US-Iran talks. Pressure was placed on Brazil to respond to the fires that are decimating the Amazon. And the US and France broke an impasse over a French tax on tech giants. But any high-level international gathering produces these kinds of limited actions, merely by facilitating interaction among world leaders.

Many have recognized the shortcomings of the latest G7 summit. But, drawn to calamity as we so often are, assessments often center on the body’s possible collapse next year, when the G7 summit will be hosted in the US by Trump, who will go nowhere near the lengths to which Macron went to hold the last one together. (On the contrary, Trump’s interest in the summit seems to revolve around his desire to hold it at his struggling golf resort in Doral, Florida.)

But this perspective fails to recognize the full implications of the Biarritz summit: it signals a broader shift in international governance away from concrete policy cooperation toward vague statements and ad hoc solutions. To some extent, the G20 pioneered this approach, but at least it had vision and a set direction. That can no longer be expected.

Unless leaders take stock of the current trend, the conclusion of the Biarritz summit will be a marker of the world order’s future – ending not with a bang, but with a whimper.


Ana Palacio is former Minister of Foreign Affairs of Spain and former Senior Vice President and General Counsel of the World Bank Group. She is a visiting lecturer at Georgetown University.

Dear prudence

Germany debates banning negative interest rates

Politicians want to protect savers. Banks are not impressed




“SAVE OUR savings, Frau Merkel!” begged Bild, a German tabloid, on August 26th. Articles blaming the European Central Bank (ECB) for keeping interest rates low, and seeking reassurances from banks that thrifty Germans will be spared Strafzinsen, or negative “penalty rates”, are proliferating. One in Die Welt in July feared that ECB stimulus would lead to the “ultimate expropriation” of the German saver.

German hostility to low interest rates is hardly surprising. The value of thrift has deep roots in the national psyche, going back to the Reformation. Households have €2.4trn ($2.6trn) stashed in bank deposits, almost as much as those in France and Italy combined. Last year they squirrelled away a tenth of their disposable income, twice the savings rate of Britons.

With markets pricing in a further cut at the ECB’s policy meeting on September 12th, the opposition in Germany is getting louder. Politicians spy a bandwagon. On August 21st Markus Söder, Bavaria’s premier, said his party would propose legislation to ban negative interest rates on retail deposits of less than €100,000. Olaf Scholz, the federal finance minister, has asked officials to look into the practicalities.

The ECB and its German critics have clashed before. Indeed, a lawsuit claiming that the bank’s quantitative-easing scheme overstepped its legal mandate is making its way through Germany’s constitutional court. But it is unusual for the finance ministry to tread on monetary-policy turf. It seems particularly so as Germany’s economy teeters on the brink of recession.

With unemployment at a record low and wages rising, though, Germans feel little need for stimulus just yet, says Marcel Fratzscher, the head of DIW, a think-tank. He sees the politicians’ proposals as “purely populist”. Regional elections are looming, so it pays to curry favour with savers.

And for all the sound and fury, negative rates for retail depositors appear some way off. The central bank’s deposit rate is -0.4%, meaning that rather than paying interest on the reserves kept with it by lenders, it charges to hold them. Some banks have passed those negative rates on to corporate clients, and a smaller fraction have done so to wealthy retail clients, many of whom appear reluctant to move their money elsewhere, even when squeezed.

But Vítor Constâncio, a former ECB official, told Der Spiegel he doubted whether banks would offer negative interest rates for ordinary retail depositors. That might be because those customers are bigger flight risks.

Banks themselves detest negative rates, which reduce the amount they can earn from interest.

The Association of German Banks (BDB) says lenders in Germany paid €2.3bn to the ECB last year, equivalent to nearly a tenth of profits for 2017. But it is also horrified by the prospect of the government setting a floor on retail interest rates.

That could restrict banks’ room for manoeuvre and, the BDB warns, cause financial disruption. (The ECB is considering other ways to ease the squeeze on banks’ interest margins, such as exempting some reserves from negative rates.)

The backlash may indicate that the ECB should be wary of the costs of cutting rates further.

The risk is that depositors stash their savings under mattresses rather than in banks. Even so, the ECB can reasonably feel irked by the stance of German officials. As Mr Constâncio pointed out, the root cause of low interest rates in the euro area is an excess of saving over spending. Germans’ obsession with frugality bears much of the blame.