In search of the new normal

D&I Quarterly Q1-Q2/2018

Posted on

18 Jun


Dittmar & Indrenius > Insight > In search of the new normal

Despite market actors’ and central banks’ valiant efforts to divine the future trends of interest rates, the only key discovery still remains that past rules governing their behaviour no longer apply. With new rules still unwritten and the future legal and economic environment shrouded in uncertainty, businesses deciding upon their financing structures have been presented with an extraordinary conundrum.

These are the key takeaways from the seminar on the future of interest rates organised by D&I on 14 February 2018. With an aim to presenting an audience of industry and business figures with a concise view of present macroeconomic trends, insight was provided by Mr Olli Rehn, former European Commissioner for Economic and Monetary Affairs and current member of the Board of the Bank of Finland, as well as by Mr Risto Murto, President and Chief Executive Officer of Varma Mutual Pension Insurance Company. A primer on the future deductibility of interest expenses was also provided by Mr Kai Holkeri, Partner and Head of Tax & Structuring at D&I.

Economizing the Economy

With inflation in the Eurozone having remained conspicuously low for several years even after the peak of the financial crisis, the ECB has continued to pursue a policy of record-low interest rates and quantitative easing in the form of asset purchases. While the central bank’s active role is to be credited in the recent recovery of the financial system and the overall economic uptick, it is still all but clear whether – and if, when – the economy at large can be trusted to keep inflation at target levels without the ECB’s intervention.

None of this, however, is to say that the economy has not recovered on a sound basis. Given that the recent Finnish recovery – current estimates indicate growth of three per cent in the year 2017 – is largely based on reliable investment expenditures and export demand while Eurozone lending to both households and businesses has seen a healthy acceleration without reaching pre-crisis levels, it can be said with confidence that the market has finally begun to find its feet again. Nevertheless, until such time that European business and finance have hit their stride without need for the crutch of cut-rate money from the central bank, market participants will need to continue paying close attention to the ECB’s monthly intentions.

Deducted Interest in Interest Deductions

Presented with this scenario of both cheap cash abound and potential economic boom in the horizon, one would assume that businesses would be quick to join the growing ranks of borrowers hungry to finance their investments. European regulation, however, has found itself a sizeable spanner in these future works, as the European Union’s Anti-Tax Avoidance Directive (ATAD) is to obligate the Union’s Member States to limit the deductibility of interest expenses. Provisions in the ATAD extend far beyond the initial goal of curbing tax base erosion and profit shifting (BEPS) in multinational corporations, mandating Member States to also reduce the deductibility of interest expenses even to third parties.

“The winning formula may just be to make the very best of the abnormal.”

The rationale of regulating such external debt without any tax planning aims has been called into question, and rightly so. Alas, businesses navigating the present uncharted economic waters amid simultaneous legislative turmoil have no choice but to get used to perpetually rethinking their financing conventions and business models. With signs of the new normal still awaiting discovery, the winning formula may just be to make the very best of the abnormal.


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