Corporate treasurers could face a negative rate game
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Corporate treasurers could face a negative rate game

Corporations around the world have grown accustomed to a low interest rate environment – but if, as some are predicting, rates in the eurozone drop below zero, the impact on corporate cash management and transaction banking relationships could be considerable.

In November, the European Central Bank cut its benchmark lending rateto a record low of 0.25% and was reported to be considering reducing rates to minus 0.1%. Such a move, which would be intended to tackle deflation, has been anticipated by the markets for some time. ECB president Mario Draghi indicated last year that it stands “technically ready” to implement negative rates. “There are emerging signs of a recovery in Europe, but if the ECB feels that they need specific initiatives to kick-start the economy again, then they could change the ECB deposit rate so that banks are charged for holding their deposits,” says Suzanne Janse van Rensburg, head of liquidity and investments for Europe, the Middle East and Africa at Bank of America Merrill Lynch.

Such a move would have serious implications for corporations operating in Europe. Since the financial crisis, multinationals have been stockpiling cash, with Europe’s companies holding over €1 trillion in their war chests. While low interest rates have meant that companies have limited opportunities to gain significant yield on their cash balances, the prospect of having to pay banks to hold their deposits might prompt companies to re-evaluate their cash management strategies.

“Security and liquidity are always key priorities for treasurers, and during the extreme stress of 2008, negative interest rates might have been acceptable in order to avoid the risk of loss of capital,” says Janse van Rensburg. “However the situation is different today, with corporate treasurers perhaps less willing to accept a negative return in order to maintain such security and liquidity.”

ECB executive board member Peter Praet, who said in November that negative rates would be consistent with the central bank's price-stability mandate.

The key question is whether banks would pass on the impact of negative rates to their corporate clients. “We believe that if euro overnight rates fell more than a few basis points below zero or remained negative for an extended period, banks would reach a tipping point where they would have to start passing on the costs for large deposits,” says Steve Everett, global head of cash management at RBS. He says that the cost might be applied in the form of a monthly fee or negative rates, for example. “No bank wants to be the first mover towards charging though,” he adds. Andreas Hartmann, head of front office in SAP’s global treasury, says that the question of whether rates could turn negative is on the software company’s radar. “The first question is, what will be negative?” he says. “Is it simply the interbank area? And the follow-up question is whether the bank will pass on the negative yield to non-financial corporates and therefore impact cash pooling structures and bank account balances.”

Hartmann says that even when using structures such as automated cash pooling, companies potentially end up with at least one bank balance that banks might then charge for. “If you look into the basket of available instruments, time deposits would likely attract a charge,” he says. “Money-market funds will not be able to operate anymore because in addition to negative interest they would have their own costs and fees. So this is a scenario that we hope doesn’t kick in, but we have looked at it as an emergency situation that could arise.”

François Masquelier, chairman of Association des Trésoriers d’Entreprise à Luxembourg, says that lower interest rates might have an impact on short-term corporate treasury placement strategies, for example by seeking to extract yield – or indeed zero return – by taking on additional risks, for example by extending tenors for deposits or shifting asset classes.

“If rates are coming down to negative, all short-term placements (MMFs,bank deposits, etc) will be penalized,” he says. “The dilemma would be where to put the cursor in order to get more return and to extract yield while maintaining a reasonable degree of risks, while not taking too much risk on board.”

However, he points out that by placing funds for longer tenors, companies might risk not being compliant with IAS 7 (“cash equivalent”), meaning that “the search for flat or positive returns could alter a corporate’s balance sheet”, leaving corporates facing the dilemma of weighing up the balance-sheet impact against the impact to their P&L.

Aside from the other impacts corporates might face as a result of negative rates, treasurers will also need to ascertain whether their treasury management systems are equipped to process negative rates.

According to Everett, alternative courses of action for corporates might include swapping the currency of deposits – however, “that may come with additional risk and cost and would need assessing in light of existing currency exposures and FX risk management policies”. Other options could include putting surplus funds to work, for example by undertaking acquisitions.

Janse van Rensburg adds that treasurers will want to explore whether it is appropriate or possible to limit their companies’ operations in negative interest rate jurisdictions or in certain currencies, or to implement jurisdiction or currency-specific investment policies. “Treasurers may wish to explore whether repatriation or paying down debt is a better alternative to holding deposits,” she adds. “In the past, we’ve seen corporates move deposits, and treasurers should consider whether diversifying among a number of banks would enhance yield.”

The prospect of negative rates is not without precedent. In Denmark, for example, the benchmark interest rate has been negative since July 2012. Similar action has been taken in Sweden and Switzerland.

“In Sweden, Denmark and Switzerland, banks absorbed most of the costs initially but, given the global rate environment and potential for arbitrage, we have now seen some limited charging for those currencies,” says Everett. “For example, some banks have started charging fund management clients for deposits in Danish krone and Swiss francs.”

However, Everett says that given the sheer volume of euros in the market, a negative overnight euro rate would have far more impact and would require more direct action from banks and corporates.

Negative rates in the eurozone might or might not become a reality – but corporate treasurers are advised to consider how such a move could affect their businesses. “The good news is that there are a number of options for treasurers planning for the potential impact of negative returns on deposits,” says Janse van Rensburg. “It’s vital that they start to consider these options without delay, and take into account the valuable advice and support that relationship banks can offer.”

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