Cash & Liquidity Management

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Repairing Treasury's Leaky Bucket With interest rates remaining at record lows and inflation edging higher, the steady erosion of value caused by corporates stockpiling cash is becoming more evident. Could solutions such as dynamic discounting help?

Repairing Treasury’s Leaky Bucket

Repairing treasury’s leaky bucket  


he steady erosion of value caused by corporates stockpiling cash as interest rates remain at record lows is becoming more evident as inflation edges higher. But solutions such as dynamic discounting could staunch the flow of cash from EMEA companies.


Andrew Burns
Andrew Burns
Business Development Director, C2FO

US interest rates continue to slowly and steadily edge higher, despite President Donald Trump declaring he’s “not thrilled” with the Federal Reserve’s policy of tightening. American corporations’ profits are at near-record levels and their treasury departments have the added luxury of deciding how best to employ the tax windfall they received earlier this year.

Contrast this picture with that prevailing across the Atlantic, where the European Central Bank’s (ECB) benchmark refinancing rate has been stuck at zero for 30 months and change is unlikely before summer 2019. While the Bank of England in August agreed a modest quarter point hike in its own base rate, that took it to only 0.75% with no further increase expected until after the dust settles from the UK’s expected departure from the European Union.

Unfortunately, for companies across Europe, the Middle East and Africa (EMEA), as the low/negative interest rate era persists, inflation has edged up to 2% and is poised to move higher. Combine higher inflation with a prolonged period of negligible investment returns and businesses are suffering a steady erosion of value.

This lose-lose situation for treasury departments is magnified by the stockpiling of cash that companies resorted to after the global financial crisis of 2008. Previously, companies sensibly avoided holding on to large amounts of cash, which served only to advertise the company as a potential takeover target.

However, the shock of a credit crisis suddenly made stockpiling cash the default mode. In the face of quantitative easing and record low interest rates, a ‘wait-and-see’ attitude developed even after treasury departments started to realise this new era might prove more than a temporary hiccup.

“‘Wait-and-see’ has proved expensive, even if many companies have paid little heed to the resulting erosion of value,” says Andrew Burns, Business Development Director at C2FO. “Companies are still getting low returns as banks continue to shun their cash. However, in a world where treasury receives zero – or even negative – returns on its cash but inflation has reached 2%, it equates to €20m of purchasing value being lost on each €1bn of cash over the course of a year.”  

“Inaction is starting to become more expensive, as deepening political risk shakes up supply chains. Brexit uncertainty, escalating trade wars, tariffs and trade sanctions, and economic crises in countries such as Turkey and Argentina are among the symptoms. Each is stoking inflationary pressures as companies begin to encounter difficulties in sourcing from many of their traditional markets.”

Break the silos down

With cash on balance sheets sitting moribund, treasurers are under pressure to offset the erosion in value from inflation by finding a suitable investment. Yet the flight to quality means that the returns from traditional safe havens such as German bunds are negligible, while most board-approved treasury policies rule out resorting to riskier investments offering higher yields.

The problem isn’t made any easier by periodic cost-cutting initiatives undertaken by many companies to maintain profitability and sustain credit ratings and investor sentiment. With the low-hanging fruit long ago identified and taken, squeezing out costs further is an increasingly painful process that, too often,  involves laying off staff, bearing down on suppliers, cutting back on activities such as R&D and re-engineering processes.

Resulting gains prove only temporary as, rather like a leaky bucket, €20m of cost savings is swallowed by the same amount or more lost to inflation and impacting on cash balances. At the same time, the potential for further cost savings without inflicting real damage on the business is dwindling.

Treasury has always focused on the impact on cash flows and debt from initiatives such as repricing and continues to do so, but current stockpiling of cash for such a prolonged period and to such an extent is unprecedented and demands a fresh approach.


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