The EconomistAugust 31st 2019 Finance & economics 65“S
ave our savings, Frau Merkel!”
begged Bild, a German tabloid, on Au-
gust 26th. Articles blaming the European
Central Bank (ecb) for keeping interest
rates low, and seeking reassurances from
banks that thrifty Germans will be spared
Strafzinsen, or negative “penalty rates”, are
proliferating. One in Die Weltin July feared
that ecbstimulus would lead to the “ulti-
mate expropriation” of the German saver.
German hostility to low interest rates is
hardly surprising. The value of thrift has
deep roots in the national psyche, going
back to the Reformation. Households have
€2.4trn ($2.6trn) stashed in bank deposits,
almost as much as those in France and Italy
combined. Last year they squirrelled away
a tenth of their disposable income, twice
the savings rate of Britons.
With markets pricing in a further cut at
the ecb’s policy meeting on September
12th, the opposition in Germany is getting
louder. Politicians spy a bandwagon. On
August 21st Markus Söder, Bavaria’s pre-
mier, said his party would propose legisla-
tion to ban negative interest rates on retail
deposits of less than €100,000. Olaf Scholz,
the federal finance minister, has asked offi-
cials to look into the practicalities.
The ecb and its German critics have
clashed before. Indeed, a lawsuit claiming
that the bank’s quantitative-easing scheme
overstepped its legal mandate is making its
way through Germany’s constitutional
court. But it is unusual for the finance min-
istry to tread on monetary-policy turf. It
seems particularly so as Germany’s econ-
omy teeters on the brink of recession.
With unemployment at a record low
and wages rising, though, Germans feel lit-
tle need for stimulus just yet, says Marcel
Fratzscher, the head of diw, a think-tank.
He sees the politicians’ proposals as “pure-
ly populist”. Regional elections are loom-
ing, so it pays to curry favour with savers.
And for all the sound and fury, negative
rates for retail depositors appear some way
off. The central bank’s deposit rate is -0.4%,
meaning that rather than paying interest
on the reserves kept with it by lenders, it
charges to hold them. Some banks have
passed those negative rates on to corporate
clients, and a smaller fraction have done so
to wealthy retail clients, many of whom ap-
pear reluctant to move their money else-
where, even when squeezed. But Vítor Con-
stâncio, a former ecb official, told Der
Spiegelhe doubted whether banks wouldoffer negative interest rates for ordinary re-
tail depositors. That might be because
those customers are bigger flight risks.
Banks themselves detest negative rates,
which reduce the amount they can earn
from interest. The Association of German
Banks (bdb)says lenders in Germany paid
€2.3bn to the ecblast year, equivalent to
nearly a tenth of profits for 2017. But it is
also horrified by the prospect of the gov-
ernment setting a floor on retail interest
rates. That could restrict banks’ room for
manoeuvre and, the bdbwarns, cause fi-
nancial disruption. (The ecbis consideringother ways to ease the squeeze on banks’
interest margins, such as exempting some
reserves from negative rates.)
The backlash may indicate that the ecb
should be wary of the costs of cutting rates
further. The risk is that depositors stash
their savings under mattresses rather than
in banks. Even so, the ecbcan reasonably
feel irked by the stance of German officials.
As Mr Constâncio pointed out, the root
cause of low interest rates in the euro area
is an excess of saving over spending. Ger-
mans’ obsession with frugality bears much
of the blame. 7Politicians hope championing savers
and chiding banks will win votesGermany’s negative interest ratesDear prudence
I
n 1769 the noble landowners of Sile-
sia—then in Prussia, now in Poland—
were short of cash. War and plummeting
farm output had left their mark. On
August 29th the king stepped in. Freder-
ick the Great issued an order establishing
a Landschaft, or landowners’ co-oper-
ative. That allowed the hard-up nobles to
issue, in 1770, the first Pfandbrief: a trad-
able bond, secured on individual proper-
ties and the assets of the whole Land-
schaft. The first investors, write Fritz
Engelhard of Barclays, a bank, and Frie-
derike Sattler of Goethe University in
Frankfurt in a book* marking the Pfand-
brief’s 250th birthday, included mer-
chants, royal houses and the churches.
The Pfandbrief, or covered bond,
became a mainstay of German finance, in
particular the mortgage market. Overtime the landowners’ individual liability
to bondholders ended. They were liable
to their Landschaften, which in turn were
liable to investors. In the 19th century
Pfandbriefe came to be issued by special-
ised mortgage banks, which backed the
bonds with housing loans. In the late
1800s building, banks and bonds
boomed. Banks inevitably lent too freely
and some investors lost money. A legal
overhaul of Pfandbriefeensued in 1899.
These days 82 German banks issue
Pfandbriefe, up from 40-odd in 2005,
when the market was loosened. Last year
€50.4bn-worth ($59.5bn) of bonds were
issued, according to the Association of
German Pfandbrief Banks (vdp), up a bit
from 2017. Of these, €43.2bn were backed
by mortgages, a 17% jump. Public-sector
bonds made up the rest, but these have
dwindled in recent years. In the first half
of 2019, €34.9bn of Pfandbriefe were sold.
Over €365bn-worth are outstanding,
€237bn mortgage-backed. That is around
12% of the entire German bond market
(government bonds make up half ).
Several other countries, chiefly in
Europe but also in Asia, have their own
covered bonds. (Denmark’s market is the
world’s biggest, at around €400bn.)
Unlike most American mortgages, the
underlying loans stay on issuing banks’
balance-sheets. That, plus strict collater-
alisation rules and safeguards for bond-
holders if banks go bust, makes covered
bonds safer bets than American mort-
gage-backed securities, according to the
bonds’ boosters. A European Union
directive this year set out a common
framework, as part of the eu’s efforts to
create a single capital market. That may
increase the attractions of Frederick’s
ancient instrument.Covered
German financeThe Pfandbrief turns 250He made it easier in Silesia................................................................
* “Der Pfandbrief 1769-2019”. Franz Steiner Verlag.