Low-interest phase not used
The federal government could have saved billions in interest payments
01/16/2023 5:34 p.m
For years, the federal government was able to borrow almost at zero cost. Apparently, those times passed faster than the Treasury Department expected. The opportunity to hedge against rising interest rates was missed.
According to its own financial planning, the federal government has to raise the gigantic sum of 539 billion euros on the capital market this year. Most of it – 325 billion euros – is needed to replace maturing bonds with new ones. This transfer of debt is routine work for the responsible federal finance agency. In normal times it is also not a political issue – in contrast to taking on new debts. But the times on the financial markets are not normal, they are characterized by the turnaround in interest rates.
In 2022, the ECB – like other central banks – ended its policy of cheap money and raised interest rates faster than ever before. For the German state, this means that it has to pay more interest again for new bonds. While the yields on federal bonds were still negative a year ago, the German state is now demanding more than two percent on the capital market again. This means that the more debt the federal government is currently rolling over, the more the interest burden will rise.
The burden could have been avoided to a large extent if the federal government had used the low-interest phase to issue bonds with longer maturities. This would have secured the favorable financing conditions for many years to come, such as how many homeowners have secured low interest rates through mortgage contracts with fixed interest rates for many years. As the “FAZ” reports, citing data from the Center for European Economic Research, the federal government has changed almost nothing in terms of the maturities of its debt securities. As a result, the average term of German government bonds changed only marginally between 2007 and 2021 from 6.5 to 6.8 years.
Rising interest rates are only gradually being felt
In contrast, other governments have issued government bonds with ultra-long maturities of thirty years or more in recent years. Austria and North Rhine-Westphalia even successfully issued 100-year bonds. On average, the countries of the industrialized countries organization were able to extend the average term of their bonds from 6.3 to 7.6 years within the period from 2007 to 2021.
If the German finance ministers – especially Wolfgang Schäuble and today’s Chancellor Olaf Scholz during the period of extremely low interest rates – had reached this average when extending bond terms, Germany could have saved a billion euros in interest payments this year alone. If interest rates continue to rise a little further, as expected, the lost savings are likely to rise further in the coming years. “It will take time for the higher interest rates to have an impact,” the FAZ quotes the chief economist at Landesbank Baden-Württemberg, Moritz Krämer.
When asked by the FAZ, the Ministry of Finance did not explain why the federal government missed the opportunity to secure low interest rates for many years to come. However, such hedging against the so-called interest rate risk would also have cost something. Investors generally charge slightly higher interest rates for long-term bonds than for short-term ones. Apparently, the Ministry of Finance simply did not expect a significant rise in interest rates and therefore did not consider long-term hedging to be necessary. However, it is now becoming apparent that these premiums would have been considerably cheaper for longer bond maturities compared to the rise in interest rates over the past few months.