Low interest rates, high creditworthiness: the federal government earns billions on new debts

Tuesday, December 15, 2020

Low interest rates, high credit rating
The federal government earns billions with new debts

Federal bonds are in great demand on the financial market. The reason is their high level of security and, in many cases, the lack of alternatives for investors. In this way, Germany can earn money by taking out new loans. One more reason for the left to put the debt brake out of action.

Thanks to negative interest rates, the federal government took billions in debt this year. The issue of federal securities to finance the budget, including special funds, resulted in interest income of around 7.07 billion euros by December 3, according to the Ministry of Finance's response to a question from the Left Bundestag member Fabio De Masi. This sum arises "against the background of historically very low interest rates".

"Thanks to the negative return, the state still earns money by selling bonds," said De Masi. Nevertheless, the papers were in demand: the bids of the investors exceeded the value of the bonds sold by around two times. "German government bonds go away like hotcakes," said the left-wing finance expert. "Investors can't get enough of it."

The federal government is so popular with investors that its creditworthiness is given the top rating of "AAA" by all major rating agencies, making repayment very secure. In addition, there is a huge market for trading these papers, which is why federal papers for pension funds, asset managers and other investors enjoy almost cash status. Investors are therefore prepared to pay on it instead of collecting interest: the average return on issuance of all paper issued by November 30 was minus 0.56 percent, according to the ministry.

ECB acts as buyer and depresses returns

One reason for this is that the European Central Bank (ECB) acts on a large scale as a buyer of securities. This increases demand, which in turn depresses returns. As of the end of October, the book value of the holdings of German public issuers acquired through the ECB bond purchase program PSPP – which includes federal securities as well as bonds from the federal states and institutions with promotional mandates such as KfW – was a good 562 billion euros.

In addition, there are papers acquired as part of the Pandemic Emergency Purchase Program (PEPP) worth more than 125 billion euros (as of the end of September). At the end of 2019, the book value of the PSPP portfolio was just under 528 billion euros, while PEPP did not yet exist at the time.

"The ECB does its job and keeps interest rates low for all euro countries," said De Masi. "Interest costs are historically low, and the national debt ratio is still below the level of the financial crisis. We can grow out of debt." A return to the debt brake would therefore be economic madness, he added.

Because of the Corona recession, the federal government borrowed the record amount of 406.5 billion euros on the financial market this year. The crisis causes enormous tax losses. At the same time, the government is spending a lot of money to mitigate the economic consequences. The emissions are intended to offset the difference between income and expenditure. At the same time, around 248 billion euros in old debts had to be repaid.

In the meantime, the debt repayment account set up in 2006, to which citizens can transfer money and thus reduce the state's liabilities, is not well received in the pandemic. Since the outbreak of the Corona crisis in Germany in March until November 30th, the voluntary cash benefits have amounted to exactly 39,899.56 euros, according to the ministry. For comparison: the federal government's debts were around 1.3 trillion euros at the end of 2019.