Earlier this week Richard Woolnough wrote a blog about negative rates and tax on interest. In it he also suggested that once the ECB stops printing the €500 note and ends issuance of its existing notes at the end of 2018, the legacy notes will trade at a premium. The argument is that because the notes will remain legal tender across the Eurozone, demand for a note with the lowest storage costs and easy portability will outstrip the limited (now finite) supply. He suggested that if you wanted to get hold of one, you might have to pay, say, €501, for the privilege. This led to a debate in the office – I thought that the reverse might be true. Whilst supply is capped, perhaps demand might fall substantially. It’s been suggested that a significant portion of the €300 billion (30% of the total notes in circulation) of those large denomination notes are held as the proceeds of crime, or for tax avoidance purposes. One of the stages of money laundering is called “integration” – in other words turning illegally held cash into legitimate bank accounts or assets. In a world where everybody knows it is no longer possible to obtain €500 notes, does attempting to use them in such a transaction act as a big signal that this person might be a criminal or tax avoider, and lead the suspicious to call the police or tax authorities? Might there therefore be an attempt by holders to turn them into “current” notes, like the €200 – or even to move into the CHF 1000 note in Switzerland? So I reckon that the €500 note should trade at a discount to face, as holders try to move out of a less liquid asset.
Anyway, we thought it would be a good idea to have a Twitter poll to see what people thought (and to experiment with our first poll). The results are in. We had 190 votes, and it seems like I’m in a minority. 50% of you agreed with Richard – they’ll trade at a premium.
The @ecb is stopping printing the €500 note. They’ll become scarce, but have crime/tax taint. Will legacy €500 notes
— Bond Vigilantes (@bondvigilantes) May 10, 2016