(Bloomberg) -- Germany getting paid to borrow for three decades will reassure Chancellor Angela Merkel’s government as it looks at contingency plans for a crisis.
Merkel’s coalition is mulling reviving the economy by boosting expenditure. If she should tap bonds to help stoke growth, she’d find the cost far better than a decade ago when borrowing hit a postwar record during the international bank crisis.
“With investors paying the government to buy bonds the temptation to suspend budget discipline and borrow is very strong,” said Frank Schaeffler, a lawmaker with the opposition Free Democrats. “Negative rates are sweet poison for the economy, for investors, for savers but I expect that won’t stop the government from going ahead and tapping the well of cheap debt.”
The country’s debt agency conceded it may have tried to sell too many bonds in a 30-year auction paying investors nothing Wednesday, as market demand faltered. Yet the government is confident it can place a sizeable amount of fresh short-term debt in case a recession warrants it, said a person familiar with planning, who asked not to be named as the discussions were private.
So far, the government has said it’s sticking to its zero-deficit principle and hasn’t said how it would finance as much 50 billion euros ($55 billion) extra spending. Germany’s central bank doesn’t see a need for fiscal stimulus at this time, even though it expects the economy to shrink again this quarter, according to two people familiar with the Bundesbank’s stance.
Budget spending limits are in focus for European bond investors after a battle between Rome and Brussels roiled Italian bonds in the past year. Germany’s public sector is running a large budget surplus and has a relatively low debt burden, while France’s was just under 100% of gross domestic in the first quarter and Italy’s is over 130%.
Across Europe, borrowing for governments and companies has never been so cheap. Bond yields have fallen to record lows, with Germany’s entire curve now in negative territory. The stock of negative-yielding debt globally has climbed to a record of more than $16 trillion as policy makers begin to restart stimulus in a frantic effort to revive slowing growth.
Germany’s “debt brake” has helped the federal government keep net new borrowing at zero over the last five years. For now, no net deficit is envisaged before 2023 at the earliest, according to the Finance Ministry’s medium-term plan. A constitutional clamp on runaway spending limits leeway for raising debt -- except in the event of exogenous shocks like natural disasters or a plunging economy.
In the midst of the financial crisis in 2009, Merkel’s government raised borrowing to a record, relying on placing a large amount of 12-month and nine-month bills into the market, a step that it could repeat, paying off the debt quickly when the economy recovers.
Between 2008 and 2017, the government budgeted about 450 billion euros in all in interest payments on fresh debt. It ultimately paid just 288 billion euros, the Handelsblatt newspaper reported in April last year, citing the Finance Ministry.
German 10-year yields are currently near a record low at around -0.65%, compared with a yield of near 3.5% at the end of 2009. Given it would take a recession to spur any emergency debt issuance, that would likely be soaked up by investors looking for safety, leaving this week’s poor auction as little more than a “hiccup” toward even lower yields, according to Rabobank.
“The notion that a loosening of German fiscal policy will trigger an upward adjustment of yields threatens a tactical correction at best in our view,” wrote Rabobank strategists led by Richard McGuire in a note to clients. “The economic distress necessary to prompt such a policy adjustment is also likely to be accompanied by yet higher demand for euro-zone safe haven debt.”
--With assistance from Birgit Jennen.
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