With open arms the international market is reportedly waiting for the 400 billion euro issue on its part. This reports on Bloomberg, on the occasion of the intense public debate that has opened in Germany in relation to the possibility of suspending constitutionally enshrined ‘senseful debt’. It is recalled that this issue led to the collapse of the tripartite coalition on 6 November, with Chancellor Olaf Salts’ SPD supporting his suspension and the Liberals of the Ministry of Interior, Christian Lindner against. In a recent interview with Handelsblatt, the head of the leading German firm of strategic advisers, supported the temporary and specifically 5 years suspension of brake debt through the increase in public lending of up to 400 billion euros. Yesterday (24.11.24), in an interview with the same newspaper, the Social Democrat Prime Minister of the state of Rhineland – Pfaltz, Alexander Schweitzer (Alexander Schweitzer) advocated a “moderate reform” of the brake debt. Not at all, coincidentally, the figure that Symble reported (to Germany’s public loan), i.e. EUR 400 billion, refers to a current Bloomberg report. Ales Koutny, Vanguard’s head of international interest rates, says Berlin could issue an additional €400 billion over the next decade. “Not everything needs to be done with a big bang,” Guy Miller, chief market strategic analyst in Zurich said. “But if these costs become productive and allow for a higher growth potential in Germany, then I think investors are ready to support this”. Miller says the market will easily digest additional debt equivalent to at least 5% of production, i.e. around EUR 220 billion (229 billion), over time. According to Rob Burrows, co-head of M&G’s global macroeconomic bond strategy, Germany could easily add around EUR 220 billion to additional costs. This could “lift up some eyebrows”, but would probably not push interest rates “significantly higher,” he said. There is evidence that part of the possible increase in the German bond supply has already been incorporated into the price. Bonds are now about the cheapest in relation to the same duration swaps ever recorded, an indicator known as swap spread. At the same time, further reductions in ECB interest rates to support the economy in view of possible US commercial duties will help to offset pressure on lending costs. Money markets price about 150 basis points for relaxation by the end of next year. “The interest rates remain low based on historical standards, making the debt accessible to these levels,” M&G’s Burrows said. However, relaxing the rules would be very unlikely to unleash a “orgy of expenditure”, said Annalisa Piazza, an MFS Investment Management analyst. It itself provides that an increase in bond sales equivalent to 1.5% of GDP would be considered to be ‘healthy’ by the market. And Fitch Ratings analysts argue that reform could unlock investment, facing the threat of a major loss of competitiveness and possible “negative evaluation action” from the house. The country is currently assessed with triple A of all three big houses, their top credit score. More generally, Europe as a whole could benefit if its largest economy could relax its wallet. “They will be vindicated,” Gareth Hill, a fund manager at Royal London Asset Management said. “If they did not do so and economic conditions worsen, this could possibly lead to a wider, possibly pan-European recession, which could eventually become more costly.” And then there’s politics. While Friedrich Murch, head of the Christian Democratic Union of Germany and a prevailing candidate for chancellery, has stated that he is open to the reform of the brake debt, any changes should gain the support of two-thirds of parliament. According to Bloomberg, Germany holds an important advantage. The government’s financial accounts are solid, a product of decades of hard fiscal decisions, and this in turn has fueled fame in political circles that it is time to waste a little. The government that will emerge from the accelerated elections in February will have to open the door, says the thought, of hundreds of billion euros in bonds to finance a wave of new investments to reform the economy. And because all these years of self-discipline have earned the country great credibility in the markets – unlike the applause for ejecting state debts to much of the world – investors will buy these extra bonds without hesitation, according to Vanguard, Zurich Insurance and Royal London Asset Management companies. If the additional loan is to go ahead, there is an emerging consensus that the mechanism originally guaranteed by Germany’s low debt burden should be changed. The so-called debt brake, which was enshrined in the constitution 15 years ago after the financial crisis to keep the loan restrained, was a political lightning rod even before the government collapsed at the beginning of the month. It is increasingly considered to prevent growth at a time when German factories have been struggling without cheap Russian gas and capital outflows have reached nearly 260 billion euros under the supervision of Chancellor Olaf Salts since 2021. At the same time, the budgetary rule retained Germany’s debt as a percentage of gross domestic product at around 60%, i.e. about half the corresponding weight facing France. Now, investors say it’s time to take advantage of this comparative shelter and raise the loan. The calls in Europe for more defence spending – most of the time directed at Germany – are becoming increasingly intense as the war in Ukraine rages and the prospect of reduced US military support under Trump’s presidency is shown. According to former President of the European Central Bank Mario Dragi, additional investments of EUR 800 billion per year are required in the EU if the bloc wants to have the opportunity to compete with China and the US. Germany’s divided political landscape means that there is a risk that far-left and far-right parties will win so much in the elections that the necessary majority will not be possible without joining one of them in the coalition that will emerge. In the last poll in August, a marginal majority of the public advocated maintaining the brake in a nation where the majority of the electorate still has in mind the overinflation that destroyed the economy a century ago.
Because markets wait with open arms for the suspension of German debt brake
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