Monty Python’s Banking

Can I pay you to borrow some money from me please?

To many people, the Financial Times headline “Germany issues debt with negative yield” must sound very confusing. Yet, “issuing debt” just means borrowing money and “yield” means the interest rate that the lender is charging. So, yesterday, Germany borrowed quite a lot of money with a negative interest rate, as they have been doing for some months, it seems.

Recently, if Germany has wanted to borrow money banks have been offering to pay the country, with your pension fund money and mine (and other people’s arguably less important spare cash), if they will do the bank the honour of borrowing from them, rather than another bank. Our illustrious bankers are now competing to give our money away. Surely, John Cleese would be hard pushed to think up a sillier scenario?

Apparently, a €4 billion auction of six-month bills (IOUs) drew a negative yield of 0.0122 per cent as a “sign of Germany’s haven status amid the eurozone debt crisis”. I must admit to getting a bit tied up with zeros but, by my reckoning, the banks have given Germany €500,000 for the privilege.

This high finance stuff is very perplexing at times, isn’t it? I guess it’s a form of insurance? I say bring back the Iron Lady (very good film by the way) and some simple home economics. Wouldn’t she have kept it in her purse for a rainy day rather than pay someone to look after it?

Banks could have lent the money to Italy, with a 7 per cent return, but clearly they didn’t think that this profit was adequate to mitigate the risk of a default. They would rather lose half a million euros lending to Germany than risk losing more. So, the real, but hidden, interest rate of Italian debt must be somewhat higher than 7 per cent, the level at which they are apparently unable to repay it. It really doesn’t look good for Italy, does it?

Isn’t it about time we put some of this money into the hands of sensible and proven entrepreneurs, who might actually create some wealth with it, rather than let our zombie bankers fritter it slowly away?

I’d love to hear the bank’s remuneration committee discussions on performance when this comes up, but I guarantee this German loan will be interpreted as quite a coup.

Mark

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