Germany to Issue Record Federal Debt to Fund Energy Crisis Aid

Kamil Kowalcze
·3 min read
1

(Bloomberg) -- Germany’s federal government plans to issue a record volume of debt next year to help fund generous aid for households and companies hit by the energy crisis.

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Debt issuance will balloon to about €539 billion ($573 billion) in 2023 from €449 billion this year, according to the German finance agency’s plan published on Wednesday. The previous record was in 2021, when the government spent freely to help offset the fallout from the coronavirus pandemic.

Europe’s biggest economy has been particularly exposed to soaring energy costs, exacerbated by the war in Ukraine, due to decades of dependence on Russian fossil fuels that have underpinned its industrial growth, and it is widely expected to go into recession during the winter.

The government has announced wide-ranging measures to cushion higher power bills, and the risk of natural gas shortages has receded thanks to lower energy use and filled storage facilities. Inflation also slowed last month, but at 11.3% it still remains more than five times the European Central Bank’s target.

Borrowing next year will include federal bonds worth €274 billion and a further €242 billion to be sold on the money market, the agency said in an emailed statement. It also plans to issue inflation-linked bonds worth as much as €8 billion and Green bonds of as much as €17 billion.

The plan is “dramatic,” according to Elmar Voelker, a senior fixed-income analyst at LBBW Research in Stuttgart.

“On the one hand, yields on longer-dated bunds could come under additional upward pressure as investors demand compensation for taking up the additional supply,” Voelker wrote in a note. “On the other, the structural shortage of bunds could ease a good deal as a result of the additional supply.”

German bonds — otherwise known as bunds — fell, lifting the 10-year yield 3 basis points to 1.95% and narrowing the spread to swap counterparts — seen as a measure of collateral scarcity — by 1.5 basis points.

Debt Brake

Germany’s ruling coalition last month extended the use of a fund set up in the wake of the Covid pandemic to include financing measures to tackle the energy crisis. A debt authorization of €200 billion has been earmarked for the so-called Economic Stabilization Fund for 2022.

The finance agency said this amount is expected to be fully used and that an additional federal note will be issued to cover the part that hasn’t already been financed during the year. It won’t be sold on the market but will be transferred directly into the fund’s portfolio as a liquid asset.

Spending in 2023 and 2024 on energy crisis measures will be financed on the market as usual, while at the same time the volume of the supplementary note held by the fund will be “gradually reduced by a corresponding amount,” the agency added.

Finance Minister Christian Lindner has decided to restore a constitutional limit on net new borrowing, known as the debt brake, next year after it was suspended during the pandemic.

--With assistance from James Hirai.

(Updates with analyst comment starting in sixth paragraph, market reaction in eighth paragraph)

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