Government Raid Corpororate Coffers - What are the Possible Effects For FX?

As corporate treasuries are tapped for their cash stock piles by indebted governments across the world, could there be implications for currency markets? 

Since the financial crisis companies have been stockpiling cash at a faster rate than ever before.

Now cash-strapped governments are trying to get corporates to shoulder more of the financial burden, if this trend continues what could be the impact on currencies and the macro-economic system?

Corporates have fared well out of the financial crisis, taking advantage of ultra-low borrowing rates, they have been able to  amass huge stockpiles of cash - and according to research -  doing so at a faster rate than ever.

Now some revenue-poor governments, noticing these huge build-ups, are removing some of the subsidies that previously supported corporates, and putting pressure on them to take more of the financial burden. 

Given austerity-fatigue and the widespread failure of monetary policy, the phenomenon looks set to grow and extend, with the possibility that the huge cash-pile of corporate savings could start to flow back into the economy.

This would probably provide an inflationary push, which could lead to the appreciation of currencies in countries where the effect is most noticeable.

The growing corporate cash-pile

The stockpiling of cash has been explained by Professor Thomas Bates, amongst others, of W.P. Carey school of Business:

“Since the collapse of Lehman Brothers in the fall of 2008, corporate officers around the world have been building up their balance sheets with mountains of cash and marketable securities — a lot of it in other countries.”

The likes of Apple, Amazon and Google, have deposited billions off-shore to avoid paying domestic corporation tax.

According to Bates, record low borrowing rates globally have made it cost effective for corporations to borrow rather than dip into their treasure-chests.

“U.S firms have taken advantage of very cheap debt rates to finance domestic stimulus.” Explains Bates.

Adding, low levels of confidence, a more uncertain world, increased competition and mac-speed changes in technology have all added to the ‘scrooge’ effect by making corporates more risk-averse.

With many governments unable to balance growing budget deficits, economic growth subdued all over the world, and monetary policy mostly failing to lift inflation; there are now signs, even conservative governments, are contemplating a ‘raid’ on the swelling coffers of corporate savings.

A new source of revenue?

The shear size of the corporate stockpile is awe-inspiring; in an article in the FT, entitiled: "Pressure mounts for corporates' cash piles to be put to work" author Anoush Sakoui, describes how large they have grown: 

"In the wake of the financial crisis the corporate world has built up huge cash reserves.In 2008, the non-financial members of the global S&P 1200 index – 975 of the world’s biggest companies – had a total of $1.95tn in cash. But by the end of 2012, that level had jumped 62 per cent to $3.2tn as a result of companies hoarding cash following a banking crisis which shattered trust in sources of credit."

In Japan, where the problem is even more accute, the government has been putting more pressure on corporates to reinvest huge stockpiles of cash compared to other countries.

Having exhausted all other avenues, including the use of massive monetary policy easing for many years, the targeting of corporates is becoming more noticeable.

In March 2015 Finance Minister Taro Aso agreed with members of his own party demanding the introduction of a tax on corporate earnings, the story was reported by Bloomberg:

“Japan is stepping up pressure on companies to use their near-record cash stockpiles to help drive growth, with Finance Minister Taro Aso saying Thursday the government should consider a tax to prod businesses into action.”

Beyond Japan

In the U.K the seeming paradox of a conservative government raising the national minimum wage is another symptom of how governments are targeting cash-rich corporates.

Combined with the Chancelor Osborne's attempt to reduce in-work benefits, the two policies together, constitute a ‘soft raid’ on corporate cash-piles, as well as an attempt to remove unofficial ‘subsidies’ government paid business and workers by propping up low wages.

In the U.S, policy-makers have been considering a ‘tax holiday’ on the huge pile of untaxed earnings which could be repatriated from overseas.

Even far right Republican’s like Donald Trump are targeting these overseas ‘treasure chests’, with policies that would close the loop-hole which allows them to bank their money overseas, and offering a one-off 10% tax rate to those repatriating their money and ‘putting it to work’ in the U.S.

This appears to be the beginning of a more general trend in governments trying to take advantage of a new source of revenue.

Some governments, such as the new Canadian administration are already giving up on austerity as a viable economic plan, embracing a more generous fiscal agenda instead, however, the issue will be how this can be paid for.

It is on this issue that the question of corporate savings may become an increasingly contentious one, as governments wishing to spend and invest end up attempting to tap corporates, who might be unwilling to release their reserves.

Potential effect on the economy and FX

If the trend outline above continues, fiscal conditions will loosen and corporate money will start to flow back into the active economy, probably resulting in higher inflation.

At the very least it could act as a counterbalancing force against current deflationary global pressures such as falling commodity prices.

As inflation rises and the fear of deflation recedes central banks will be able to drop their highly accommodative stances and begin a tightening cycle, albeit a very shallow one.

In those countries where these measures are adopted it will probably have the effect of appreciating the currency.