Negative short term bond rates in the Eurozone explained

In any transaction, people prefer what they receive to what they give.

If some people prefer a promise to receive 99 euros in six months to holding 100 euros today, it is because these are not the same euros.


by André Cabannes, PhD Stanford University

July 10, 2012


facebook   twitter   mail

We explain how, in the apparently strange financial transaction with a negative interest rate, people actually get rid of a currency which is likely to become local, and accept a promise (with a lower face value) in a currency which is expected to remain strong. In other words, negative short term bond rates in the Eurozone signal imminent local currencies as well as their forthcoming devaluation.


Prerequisite to understand currency and monetary problems

A good understanding of double-entry accounting is necessary to understand currency and monetary problems. We offer such a course for free.

Selected other courses:

Other notes:

We learned in the French medias in the last few days the "good news" that France was able to borrow at negative rates for short term loans, "like the strong countries of the Eurozone".

Newspapers and other medias give no explanations whatsoever on this quaint borrowing. They just repeat a dispatch from Agence France Press.

How is it possible?

The crux of the matter is that the euros lent to France are not central-bank-euros! (which we call for simplicity "true euros").

Indeed nobody in his right mind would lend 100 true euros today and be happy to receive 99 euros in six months. There exists an obviously better financial strategy. These euros lent to the French government are therefore of a different kind. They are euros in creditors accounts of secondary banks which have difficulties converting them into central-bank-euros. These banks belong to clearing systems in countries on the brink of switching to a local currency and may be authoritatively converting all euro bank accounts into local-euro denominated bank accounts.

(We leave aside those institutions which are legally required to lend their excess cash. The negative interest rate they may be forced to accept is then akin to a tax.)

The Agence France Trésor (which manages the French public debt, and has not changed its haughty behavior since the Ancien régime) traditionally gives no information on its wheelings and dealings. So we can only guess what's going on: people or outfits who have accounts in countries where 100 (local) euros are likely to become 70 euros in a foreseeable future, prefer to place them elsewhere, hoping that they will get back true euros even if it is less than the face value of their loan. These are probably Spanish or Greek euros, possibly French, unlikely German.

Interestingly, investors bet that France will have for a longer time than other weak countries in need of money the capability to give back true euros, even if it is a little less than the face value of the initial loan.

Personally we think they are mistaken, and will get gypped anyway.

If they really want to protect the value of their present secondary-bank-euros, rather than buying government promises they ought to change them for real ones (banknotes, or if they are priviledged credit in a central bank account, like civil servants at le Louvre used to brag about when they had personal accounts directly at the Banque de France) when it is still time, or for any other value that will remain strong.

France had better introduce soon a eurofranc next to the euro, and from now on pay civil servants wages and other public expenditures within France with eurofrancs.


This will put an end to the outrageous situation where civil servants at Bercy borrow from Berlin to pay themselves, and tell the lenders: "France will pay you back" - like profligate youngsters at a night club saying "send the bill to our parents". Instead we will pay our servants with pieces of paper which we issue, and that they can spend buying goods and services we produce. Similarly my cleaning lady doesn't borrow euros overseas to pay herself; instead I give maths lessons to her son, which is equivalent to a local money. And if Bercy objects that this shirks taxes, we are willing to teach them arithmetic.

Notice that this kind of local money has been used for two centuries around the world in large firms offering various fringes to their workers, but that could only be obtained in the firm's stores.

More generally speaking, servants to any community ought to be paid with the internal currency of that community (see multiple currency monetary systems).

This will also help French people buy French cars. Call it "protectionism" if you will, or simply "wise economic management" (like we do in our household), no matter what: it will put an end, there again, to the absurd situation where France builds fine cars, but imports more cars than it exports (!) and cannot compete with Korea which applies protectionist measures as well as measures to help its exports, and has its own currency.

Finally this will help balance trade with our foreign partners.

André Cabannes