Companies in Europe are starting to cut the record amounts ofcash they accumulated since the financial crisis but they're notspending it the way central bankers hoped they would.

Corporate treasurers cracked open their war chests after cashholdings for the region's biggest companies swelled to a peak of697 billion euros ($761 billion) in June 2015, according to datacompiled by Bloomberg. But instead of spending the money to expand,companies are shifting it into short-term securities, the datashow.

Treasurers are rethinking their investment strategies after theEuropean Central Bank cut its main interest rate to negative thisyear, effectively charging lenders to park their corporate clients'money in its vaults. With bond yields pushed to record lows andeconomic turmoil damping the allure of expansion or takeover plans,companies in Europe are looking for ways to reduce the cost ofholding cash.

“QE has worked very well for financial markets, not so well forthe real economy,” said Alberto Gallo, a London-based partner andportfolio manager at Algebris Investments. “When companies startspending their cash on buying financial securities, you will get arecovering financial market, you won't get job creation and youwill get more inequality.”

Cash and cash equivalents held by nonfinancial companies in theStoxx Europe 600 Index dropped to 646 billion euros at the end ofSeptember from the peak in June last year, Bloomberg data show.

“European corporates have not shown much conviction in thegrowth outlook and haven't been in a hurry to commit themselves tolarge capital expenditures,” said Srikanth Sankaran, head ofEuropean credit and asset-backed securities strategy at MorganStanley. “The question is what would they spend the cash on?”

Some firms have increased “other investing activities” — acategory on their balance sheets that captures short-terminvestments, according to Sankaran. Europe's biggest nonfinancialcompanies spent almost 50 billion euros this year on theinvestments, the most for any year in Bloomberg data going back to2009 and up from 30 billion euros for 2015.

But ECB President Mario Draghi embarked on his unprecedentedstimulus plan to encourage growth. That may yet happen if the costof cash continues to rise and yields remain negative, according toBarnaby Martin, a European credit strategist at Bank ofAmerica Corp.

“It should motivate more companies to stop saving and startspending,” said London-based Martin. “Given we have lots ofnegative-yielding corporate bonds in Europe, companies mayeventually decide to take advantage of this and do largedebt-funded acquisitions.”

Companies have been reluctant to commit capital to expansion ortakeovers because of uncertainty over the U.K.'s decision to leavethe European Union and as slowing growth clouds the region'seconomic outlook. Euro-area gross domestic product growth slowed inthe second quarter to 0.3%, down from 0.5% in the first threemonths of the year, while inflation rose to an annual 0.4%, farbelow the goal of just under 2%.

Capex, M&A

Capital expenditure at the biggest listed European non-financialcompanies was at 151 billion euros at the end of September,according to Bloomberg data. That compares with 158 billion eurosat the end of last year and 154 billion euros at the end of 2014.The companies' planned 453 billion euros of mergers andacquisitions this year is set to fall short of the 647 billioneuros of deals announced in 2015, the busiest year since 2007,Bloomberg data show.

“Additional interest-rate cuts wouldn't create extra investmentor result in higher inflation rates,” said Arnd Zinnhardt, chieffinancial officer at Darmstadt, Germany-based Software AG. “Andthose are what Mr. Draghi wants to achieve.”

While only a handful of companies have the expertise to investtheir cash in credit markets, more may start, according to JoseLinares at JPMorgan Chase & Co.

“This is a very recent development primarily because of thenegative interest rate environment in euros,” said Linares,London-based head of corporate banking for EMEA. “If we're in aprolonged environment of low or negative interest rates, morecorporates may have to look at those options.”

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