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I ‘ve already stated my views on the ECB zeroing the deposit facility rate which i think will lower money market turnover and push most returns on repos and high quality paper negative (something which is already happening). One of the areas where negative rates are destined to bite hard is pension and investment funds. They are risk averse investors and mostly invest in high quality securities (held to maturity) and repos. Zero and negative returns are certain to make their life much more difficult and in the long run make covering their future liabilities (pensions for an ever aging population) a challenge.

Based on the most recent ECB data (pension funds, investment funds), pension funds hold €797bn in deposits, €468bn in loans, €1232bn in general government securities (and 2812bn in securities in general) and €1701bn in investment fund shares. Investment funds have a total of €6056bn in assets, with €2107bn in bond funds and €1496bn in mixed funds.

Probably more than €5tr in assets are in the risk of earning much lower (or negative) returns (especially in the case of investments in AAA assets). Just a 25bp drop in interest rate income translates in more than €12bn less income annually which will ultimately mean less direct income for households (through returns on their fund shares or in their pension income) or more borrowing from governments in order to be able to pay for pensions.

Dropping interest rates to zero or even negative territory should be regarded as it really is, an indirect tax on the economy with deflationary dynamics since it ultimately just destroys money.

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Kostas Kalevras

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