While treasurershave been dealing with low interest rates for years, they're nowfacing negative rates on bank deposits in some parts of the world. Theprospect of paying a bank to hold company funds has an Alice inWonderland feel to it, but central banks in a number of countrieshave implemented monetary policies that charge negative rates on the depositsthat banks hold with the central banks. Banks in turn are passingthose negative rates on to commercial depositors.

Where rates are negative.

Negative rates were seen first in Europe, where the central banks of Denmark, Sweden, and Switzerland set benchmarkrates below zero as they tried to spark economic growth andlimit the appreciation of their currencies. The European CentralBank (ECB) moved to a -0.2% deposit rate in two steps in 2014 andthen pushed its rate to -0.3% in December. In January, the Bank of Japan joined in, setting a rate of -0.1% on the excessreserves it holds for financial institutions. The market is waitingto see whether the ECB goes still more negative at Thursday'smeeting. The central banks that have imposed negative ratesgenerally charge them on only a portion of the reserves they holdfor financial institutions.

It's not likely to happen in theU.S.

The shift to negative rates by the ECB and the Bank of Japan ledto talk that the Federal Reserve might be the next to adopt a negative ratepolicy. But recent data suggest the U.S. economy is continuingto recover and the Federal Reserve need not experiment withbelow-zero rates.

A negative interest rate policy “shouldn't even be a topic inthe U.S. because additional monetary stimulus is not needed,” saidWard McCarthy, chief financial economist at investment bankJefferies.

The U.S. economy is “in much better shape than anyplace else, atleast in part because the Fed was really aggressive really early inthis cycle and continued to be aggressive,” he said.

McCarthy also argued that negative interest rates are notappropriate for all economies. “I think it makes sense for smallopen economies that rely heavily on exports, and therefore theircurrency, for growth,” he said. “It made sense for Switzerland; itmakes sense for Denmark.”

But for a large economy like the U.S. that relies much less onexports, the benefits of negative rates would be debatable,McCarthy said. At the same time, the policy would pose financialand political risks for the Fed.

What does this means fortreasurers?

Treasurers may not need to worry about negative rates on theirdeposits in the United States, but they could well run into them inEurope.

Stephen Baseby, associate policy and technical director at theLondon-based Association of Corporate Treasurers (ACT), said that“either extremely low yields or negative yields are passing throughto the corporate.”

The earnings rates on deposits under three months in sterlingcurrently range from 0.2% to 0.4% a year, Baseby said. “Ourcolleagues in euros are beginning to find they're being offerednegative rates.

“It creates some interesting anomalies,” he added, noting thatsome Swiss companies were holding cash in current accounts, whichdon't pay interest, to avoid being charged negative rates. “Butmost bank regulators have understood that one—they put limitationson money in current accounts.”

Baseby and others note that deposit rates inEurope are being driven lower not just by central banks' negativeinterest rate policies, but by BaselIII's liquidity coverage ratio, which increased the amount ofhigh-quality assets banks have to hold against customers' deposits.And at this point, many of those high-quality assets, such asEuropean sovereign bonds, offer negative yields.

“If I put 1 million pounds with a bank as a corporate, it has togo out and buy 400 pounds of gilts with it straight away, or ifit's euros, central bank bonds over there,” Baseby said. “If thosebonds have a negative rate, it immediately lowers the effectiverate [the banks] can pay [the corporate], even if they lend thatmoney out commercially.”

Baseby downplayed negative rates as a concern for treasurers,though. “The problem of very low returns on cash has been with usfor quite some time,” he said. “The move to negative rates isannoying, but it's not catastrophic. It doesn't change the overallargument for holding cash.”

Negative rates and borrowing.

If interest rates are heading below zero, it seems thatcompanies might benefit by being able to access money more cheaply,and certainly rates in the corporate bond market have headedlower.

But an October report from Bank of America Merrill Lyncheconomists notes that in Denmark there was an increase in the costof both housing loans and loans to nonfinancial companies, while inSwitzerland the cost of mortgages rose. The BofA economists suggestthe move in borrowing costs may reflect “banks' attempt to offsetthe deposit rate effect on their profitability.”

Anthony Carfang, a principal at Chicago consultancy TreasuryStrategies Inc., said the very imposition of negative rates canlead to concerns that affect borrowing rates.

The negative rate“says there's a lot of risk in the market,” said Carfang, picturedat left. “So the risk premium gets much bigger. While we'll seelower borrowing costs than normal, we won't see borrowing costs gonegative. And the spread between borrowing costs and investmentyields will widen in a circumstance like this.”

Baseby noted that many corporates in Europe have found theirbank facilities contain interest rate floors. “The rate cannot gobelow a number that is positive,” he said. “The central bank'sartificially low rate is not being passed through.

“The one opportunity is when borrowing facilities need to berenewed or are having other terms changed in them; the borrowersare using those opportunities to negotiate out the floors,” headded.

In the United States, as companies renew credit lines, somebanks are now adding floors on interest rates into the agreements,said Craig Martin, executive director of the Corporate TreasurersCouncil at the Association for Financial Professionals (AFP).Interest-rate floors are also being added to swaps agreements, hesaid.

How to cope with negative rates.

Carfang said negative rates are another factor pushingtreasurers to improve cash forecasting, including forecasting theircash by jurisdiction. “Then with those numbers, you move the moneyaround to give you the optimum return,” he said.

“The better your forecast, the further out you can invest yourcash,” he said. “There's no country that has negative rates all theway out to the long term.”

Multinational treasuries tend to operate treasury centers andare able to sweep cash from the accounts of their local businessunits to the treasury center, allowing them to move excess funds toa country where they can get positive rates, said Tom Deas, a vicepresident at FMC and former chairman of both the NationalAssociation of Corporate Treasurers and the International Group ofTreasury Associations. Large companies also have the ability tohandle the foreign exchange issues involved, he said.

For treasurers of multinationals, negative rates increase theimportance of the mobility of cash and “just-in-time fundingpolicies,” so that cash can be swept to a country where it can beinvested at a positive, rather than a negative, rate, Deas said.“It would be a big disadvantage if there were cash in a countrythat had negative rates and a borrowing need in a country withpositive rates—you'd bear the worst of both worlds.”

But the ACT's Baseby cited foreign exchange exposures “and, inthe case of the EU, the quite burdensome reporting requirements”related to using derivatives as obstacles to sweeping cash from onecurrency to another, and predicted that treasurers “will tend tostay in their natural currency.

“What they are doing is looking at alternative means ofdepositing cash,” he said. “Some are looking at the repo market,which at times offers an enhanced yield.”

Treasurers are also investing directly in short-term corporatepaper and making more use of separately managed accounts through asset managers operating inEurope, said AFP's Martin. Companies can also look at naturaloffsets, he said, such as using the cash they have in countrieswith negative rates to make acquisitions or invest in thebusiness.

Carfang said treasurers also need to stress test, keeping inmind that their experience in moving from, say, an 8% rate down to4% might not be relevant when interest rates are extremely low ornegative.

“If you really did get charged negative rates, you mightactually change your behaviors in some radical ways,” he added. “Ifa bank was really going to charge you 25 basis points to hold yourmoney, rather than have the bank charge you, [you might] pay all yourbills or pay some of your suppliers in advance and let them holdthe cash. That may be your best investment option.”