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Tumbling Interest Rates In Europe Leaves Some Banks Owing Money On Loans To Borrowers

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Tumbling interest rates in Europe have put some banks in an inconceivable position: owing money on loans to borrowers.

At least one Spanish bank, Bankinter SA, the country’s seventh-largest lender by market value, has been paying some customers interest on mortgages by deducting that amount from the principal the borrower owes.

The problem is just one of many challenges caused by interest rates falling below zero, known as a negative interest rate. All over Europe, banks are being compelled to rebuild computer programs, update legal documents and redo spreadsheets to account for negative rates.

Interest rates have been falling sharply, in some cases into negative territory, since the European Central Bank last year introduced measures meant to spur the economy in the eurozone, including cutting its own deposit rate. The ECB in March also launched a bond-buying program, driving down yields on eurozone debt in hopes of fostering lending.

They must be poor spreadsheets if they couldn't cope with negativity.

Imagine the housing frenzy here if you got paid to take out a loan for an over priced house!

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And of course I’d have to actually buy real estate, which might be a good investment, but requires upkeep and management. Far easier would be to exchange my existing mortgage on my New York apartment for one with a negative rate one that would pay me money, or to borrow in dollars and swap that for a negative-rate loan in euros, krone or francs.

I discussed this approach with Andy Hill, director of market practice and regulatory policy for the International Capital Market Association in London, who said that it’s possible, at least in theory. He said a broker-dealer could help me execute a swap — a transaction in which one income stream is exchanged for another.

In my case, I’d trade the payment stream on my mortgage for, say, a negative-rate payment stream on euro-denominated debt, capturing the spread between the two. My counterparty would make my interest payments, and I’d make his — and in this case, since they are negative, I would be receiving payments.

Sounds like a great deal, although once again, as Mr. Hill pointed out, I’d have to assume the currency risks, which might erase any interest rate gains.

But don’t hold your breath. I contacted four major banks and none were willing to help. No one seems interested in swap transactions of less than $10 million. You also have to be an “eligible contract participant” under Dodd-Frank legislation, which means, among other criteria, that individuals need net assets of over $10 million. And then there are transaction costs, which would diminish any rate advantages.

Looks like the proles will mostly be excluded from negative rates, although great potential for the mega rich buying in London surely?

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I guess lenders never considered the possibility of interest rates going negative when they wrote their contracts. ;) They won't make that mistake twice.

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If it sounds to be good to be true and all that.

Looks like were smack bang 2007 when [greedy] people were shovelling cash into Iceland before it all blew up.

This time interest rates will rise sharply and the banksters will confiscate all of the assets using their magic money.

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