“Unnaturally Low” Interest Rates Saves Germany Billions In Debt

Germany’s debt cost is now at a record low, reported the Associated Press on Sunday, as investors continue to gobble up German bonds at “unnaturally low” – and sometimes even negative – interest rates for the ‘privilege’ to park their cash in Europe’s strongest economy.

Germany’s debt cost is now at a record low, reported the Associated Press on Sunday, as investors continue to gobble up German bonds at “unnaturally low” – and sometimes even negative – interest rates for the ‘privilege’ to park their cash in Europe’s strongest economy.

Last Wednesday for instance, the Deutsche Bundesbank, Germany’s central bank, reportedly managed to auction off 5 billion euros ($6.1 billion) in two-year treasury notes at an average yield of negative 0.06 percent – meaning that investors were actually losing money simply by lending to Germany.

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On Friday, the country’s ten-year bond yield also fell by five basis points to 1.17 percent, which is close to its June 1 record low of 1.127 percent and notably lower than Spain’s or Italy’s ten-year bond yields of 7.27 percent and 6.19 percent respectively.

As a result of the low interest rates, Germany has saved about 10 billion euros ($12.5 billion) from potential debt cost in this year alone, says economist Jens Boysen-Hogrefe of Germany’s Kiel Institute for the World Economy.

[quote]Comparing current interest rates to those from 1999 to 2008, Boysen-Hogrefe estimates that Germany’s central government may have saved some 68 billion euros in debt through 2022 – from the bonds it has auctioned off since 2009.[/quote]

But, should the crisis in the eurozone worsen, Germany’s savings will be in danger of being seriously eroded, warned Roland Doehrn, an expert on growth and economic cycles at the RWI economic think tank.

As the eurozone’s economic heavyweight, Germany is obliged to provide up to 300 billion euros in loans and guarantees to weaker European members in the event of a worsening crisis. Though the country can now finance that sum by increasing its own debt, any increase in interest rates would then mean “significant additional spending for Germany,” said Doehrn.

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According to Wolfgang Schaeuble, Germany’s Finance Minister, a sustainable long-term interest for Germany’s 10-year bonds should be in the 2 percent range.

[quote]”I believe the unnaturally low interest rate level — which practically is a negative interest in real terms — is more the reflection of the financial markets’ worries than of stability. That’s why I prefer stability (for the eurozone), then we will still have a low interest rate level,” he said.[/quote]

Additionally, Schaeuble acknowledged that “some of our partners in Europe suffer from the burden of too high interest rates caused by the irritations in financial markets,” but he insisted that those countries must reform their economies and bring their finances in order to regain market confidence.