Increased federal debt exceeds projected revenue from fresh borrowing
The German government, under the leadership of Chancellor Friedrich Merz, is set to increase the issuance of federal bonds in the fourth quarter of this year, following an escalation in government debt and a rise in yields on German bonds.
The German Finance Agency (Deutsche Finanzagentur) will be responsible for issuing an additional 10.5 billion euros in federal bonds, an increase of 15 billion euros from the initial plan. This follows an increase of 19 billion euros in bond issuance in the third quarter.
The decision to increase bond issuance comes as the government has abandoned fiscal discipline to finance increased military spending and infrastructure modernization. As a result, the net new debt this year is expected to rise to around 143 billion euros and reach almost 175 billion euros by 2026.
The rise in yields on German bonds has been a cause for concern. German bonds fell slightly, causing the yield on 10-year bonds to rise by one basis point to 2.69%. If yields persistently increase, corporate and consumer loans (especially mortgages) could become more expensive.
Financial analysts, such as FMW, have suggested that the escalation in government debt could push up yields on German bunds. An ever larger portion of the federal budget would have to be spent on servicing the debt, rather than actual expenditures.
The increased bond issuance is part of the financial plan presented by Finance Minister Lars Klingbeil. The plan, which sets priorities, saves money, and uses it sensibly, provides for record investments of around 130 billion euros in the next year. Klingbeil stated that the plan is a "clear focus" with three priorities: investing, reforming, and consolidating.
The final vote in the Bundestag on Klingbeil's budget for this year is scheduled for tonight, before it is expected to overcome its final legislative hurdle in the Bundesrat on September 26. The total debt for the year will amount to approximately 425 billion euros, compared to the originally announced 380 billion euros in December.
It is worth noting that this bond issuance will exclude green bonds. The German government has been criticized for not doing enough to address climate change, and the exclusion of green bonds from the issuance could be seen as a missed opportunity to invest in sustainable projects.
The federal election in February delayed the passage of the financial plan for the year. The election resulted in Merz's conservatives coming to power with the social democrats as junior coalition partners. The spending plan for the next year, to be passed in December, will be a key test of the coalition's ability to work together and manage the country's finances.
The increased bond issuance and the rising yields on German bonds are issues that will continue to be closely watched by financial analysts and investors in the coming months. The German government's ability to manage its debt and maintain fiscal discipline will be crucial to the health of the economy and the stability of the eurozone.
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