U.S. News --- CAPITAL: Interesting Situation: When Rates Turn Negative
It has been five years since the onset of the global financial crisis. The first cracks in financial markets appeared in August 2007. That is so long ago, it's easy to overlook just how unusual these times are.</br></br>Here's one signpost: Investors are so skittish that instead of demanding interest when they lend to governments, they are actually paying to put money into the coffers of the financially sturdiest governments. We have blown past zero interest rates. Investors lend 100 euros (or Danish kroner or Swiss francs) and get back 99 and change.</br></br>Wow.</br></br>The European Financial Stability Facility, backed by the stronger governments of Europe, this week borrowed 1.43 billion euros ($1.77 billion) for three months at a yield of minus 0.0217%. Denmark recently raised 420 million kroner ($70 million) at minus 0.59%. Even more remarkable, Germany borrowed 4.17 billion euros for two years at an average yield of minus 0.06%. Markets have pushed two-year yields on Swiss government debt below zero regularly, and Belgium, Finland and the Netherlands occasionally.</br></br>Interest rates below zero used to be more economists' fantasy than reality. Few thought central banks would ever need, let alone be able, to cut rates below zero. When the U.S. was struggling in 2009, Harvard University's Greg Mankiw observed that minus 3% rates would help. "You could borrow and spend $100 and repay $97 next year," he wrote. That would give spending a boost. The problem, he added, is "nobody would lend on those terms. . . . It would be better to stick the cash in your mattress."