Low rates alone aren’t enough to make it easy to pay off a loan. Many companies may find that out the hard way, especially as high-yield debt markets show signs of strain lately.
U.S. companies went on a borrowing binge in recent years. Nonfinancial corporations owed $8 trillion in debt in last year’s third quarter, according to the Federal Reserve, up from $6.6 trillion three years earlier. As a share of gross value added—a proxy for companies’ combined output—corporate debt is approaching levels hit in the financial crisis’s aftermath.
The negative: Rather than investing the funds they raised back into their businesses, companies in many cases bought back stock instead. That was something that many investors welcomed, but it may have come with future costs that they didn’t fully appreciate...
In aggregate, nonfinancial companies’ cash flows over the past three years were enough to cover capital spending. That is unusual—typically, capital spending outstrips cash flows as companies invest for growth—and is reflective of how muted business investment has been since the financial crisis. Over the same period, the companies repurchased $1.3 trillion in shares....
The sticking point is that in a low-growth environment, paying down debt also may be harder. Especially because companies weren’t putting the money they borrowed into capital investments, which provide cash flows to help service debt. The stock they bought back won’t do that for them.
Even if this doesn’t present an immediate problem for all companies given how they refinanced debt to longer maturities, it could be a long-term drag on earnings
The Bank of Japan, the European Central Bank and several smaller European authorities have ventured into the once-uncharted territory of negative interest rates. But what are negative rates, and how do they come about?...
So what does a negative deposit rate at the central bank accomplish?
It pushes down short-term rates on other types of lending. In theory, that is supposed to provide an economic boost. And, also in theory, it weakens the country’s currency.
What rate is now negative in Japan and the eurozone?
The deposit rate—the floor. Instead of getting paid for depositing with the central bank, the commercial bank now pays the central bank when it does.
How does a central bank actually impose a negative rate on deposit accounts?
It makes the electronic balances in those accounts shrink. A deposit of €10,000 at the ECB today is €9,999.92 tomorrow.
What does a commercial bank do when deposit rates are negative?
In theory, it should want to get rid of its extra reserves, because those have to go in a central-bank deposit account and will be shrunk....holding additional reserves carries a cost when rates are negative.)...
Can’t commercial banks lend excess reserves to customers?
No. Reserves can only be held by institutions that have reserve accounts—generally other banks and possibly the government. It’s a closed loop. (Well, almost closed: Electronic reserves can be exchanged for bank notes.) Banks lend and borrow reserves among themselves. They can also buy stuff, like bonds, with their reserves, but such transactions just move reserves around among banks...
Does it actually help the economy?
It’s hard to say. There haven’t been sharp turnarounds in the countries that have tried negative rates. Economic growth in the eurozone last year was 1.5%, better than the 0.9% recorded in 2014. (Negative rates began in mid-2014.) But growth appears to be tailing off. In the fourth quarter of last year, the eurozone grew at an annualized rate of 1.1%.
Isn’t this bad for banks?
It is. Banks do lots of things, but the very core of banking is lending money at higher rates than you pay to depositors: Lending at 6% and paying depositors 2% is a nice business. But banks are now lending at extremely low rates, yet they have a hard time pushing the rates they pay depositors much below zero.
Depositors, especially smaller ones, can hold cash instead of facing negative rates. Cash is like a deposit with an interest rate of 0%. It doesn’t shrink: €10,000 in cash will be €10,000 tomorrow, not €9,999.92. Might want to buy a safe.
Commercial banks get the cash they give to their customers from the central bank: The central bank gives them bank notes and reduces their reserve balances. (That’s how reserves escape the closed loop.)
That’s good for banks, then—don’t they want to get rid of excess reserves?
To a degree. But banks don’t want customers to yank their deposits en masse. It would be better for banks if they could find a way to keep customers but charge them negative rates.
For central banks, it defeats the purpose of negative rates: If customers suddenly pulled huge amounts of deposits, commercial banks might start needing reserves—and that demand would push the interbank lending rate up, exactly the opposite of what central banks are trying to do.
First Western journalist to visit ISIS says US wants to ‘divide’ Syria
Jurgen Todenhofer, who in 2014 became the first Western reporter to be allowed first-hand access to Islamic State, told RT that the new ceasefire is working, but expressed concern that US politicians are set on splitting Syria up into a fractured warzone.
“There is a move now from the rebels to separate their brigades from those of the terrorists, and this gives an opportunity to attack Al Nusra and other Al Qaeda groups, without attacking the rebels,” the 75-year-old told RT in a Skype interview, saying he had spoken to several sources inside the country, since the US and Russia-mediated agreement came into force
“The US divided Iraq, they divided Libya, and now they could divide Syria into four or five parts. Divided countries are weak countries, and I have an impression that certain American politicians like weak countries in the Middle East.”
Rising defaults on auto loans are a risk that bears watching for bank investors
...auto-loan write-offs have started accelerating. In the fourth quarter, rising 16% from a year earlier, according to the FDIC data. And more trouble looks to be coming around the bend: Auto loans that are 30 to 89 days overdue rose to 1.82% of total auto loans in the fourth quarter, the highest level since 2011....Keep in mind that these are the stresses showing up in auto loans that banks have kept on their books. Often, these are some of the best-quality debts....
Lots of riskier auto loans have been packaged into securities and sold to investors or were originated by nonbank firms. Banks had $384 billion of auto loans on their books at the end of last year, but households had auto-loan balances of over $1 trillion, according to Federal Reserve data.
Indeed, Fitch Ratings warned last week that delinquencies of over 60 days on securities backed by subprime auto loans hit almost 5% in January. That is the highest since September 2009 and close to the record peak hit that same year.
“Business activity stagnated in February as malaise spread from the manufacturing sector to services. The Markit PMIs are signalling a stagnation of the economy in February, suggesting growth has deteriorated further since late last year.
“Prices pressures are waning again in line with faltering demand. Average prices charged for goods and services are dropping once again, down for the first time in five months, as firms compete to win new business
“Worse may be to come, as inflows of new business have slowed sharply, causing backlogs of work across both sectors to fall at the fastest rate seen since the 2008-9 financial crisis. Such weak demand suggests that business activity and price discounting look set to continue.
“However, perhaps the brightest warning light is the downturn in business optimism to the joint-lowest recorded by the survey, suggesting firms are bracing themselves for trouble ahead.
“The only positive note in the PMI report is the sustained robust rate of job creation in the services sector, though it seems inevitable that firms will take a more cautious approach to hiring if demand continues to wane in coming months.”