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Euro will slide if €500 notes are abolished, says Bank of America Merrill Lynch
Scrapping high-value €500 bills could knock the euro's value, according to Bank of America Merrill Lynch.
Athanasios Vamvakidis, a currency strategist at the US bank, said that withdrawing €500 notes from circulation would weaken the currency.
“Abolishing a note that represents almost 30pc of the total euros in circulation would be a negative for the currency,” he said. There are currently €306.8bn worth of €500 bills in circulation.
Mr Vamvakidis said that scrapping the €500 note would primarily weaken the euro against the US dollar and the Swiss franc: “The US dollar is the most liquid currency and we would expect it to capture a large share of the drop in the demand for the euro as a store of value.
“However, the Swiss franc could also benefit, having the largest note denomination in G10 economies. Indeed, the 1000 Swiss franc note is already very popular, representing more than 60pc of the Swiss franc notes in circulation.”
Anecdotal evidence suggests that the bills are “used to hide illegal income”, according to an older BAML report.
Earlier this week, Peter Sands, the former chief executive of Standard Chartered, recommended eliminating €500, $100, 1000 Swiss franc and £50 notes in order to reduce fraud. "Ask people in the United Kingdom when they last used a £50 note, the highest sterling denomination, and the most common answer is to pay a builder or plumber accounts for the loss of up to 70pc of tax income," the ex-bank boss wrote in a report.
"The incentive is tax evasion, since payment in cash makes it easier for the individual to avoid VAT of 20pc and if the builder pays his workers in cash, he in turn avoids employment taxes and they avoid income tax."
However, the ECB has in the past defended the issuance of high-value euro bills. In 2012, Mario Draghi, president of the central bank, said that “high-denomination euro banknotes fulfill an important role as a store of value and are a last resort for storing assets”.
He added: “The issuance of euro banknotes follows the demand of the economic agents, both in terms of denomination and quantity. Therefore, the ECB does not plan to change the denominational structure of the euro banknotes."
More recently, Benoit Coeure, an ECB executive board member, said: "The ECB is assessing the fate of the €500 euro banknote, as concerns about its use in money laundering and crime grow and its usefulness for large payments comes into question."
It has since been reported that the European Union will investigate the use of such high-value notes by terrorists. It has long been believed that such notes assist smugglers and drug dealers, but there are now concerns that they may also be useful to terrorists.
In the aftermath of the November attacks in Paris the EU will look at the possibility that high-denomination bills have been used in terrorist financing.
Charles Goodhart, a former Bank of England policymaker, said last year that Swiss and ECB central bankers had been “absolutely shameless” in continuing to issue high-denomination notes, suchs as 1,000 Swiss franc and €500 bills.
These high face-value notes “are there to finance the drug deals”, Mr Goodhart said at the annual Money, Macro and Finance Conference in London.
Sir Charles Bean, also a former deputy governor at the Bank of England, echoed Mr Goodhart’s concerns. He said that he was “all in favour of getting rid of big-denomination notes, which are used in the black economy”.