German finance minister plans ‘debt brake’ suspension

German Finance Minister Olaf Scholz of the Social Democratic Party (SPD) speaks during an interview in Berlin, Germany. (Reuters)
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Updated 27 February 2020

German finance minister plans ‘debt brake’ suspension

  • Scholz has long backed plans to lift a near-unbearable burden of repayments from 2,500 municipalities by shifting €40 billion ($43.5 billion) of their debts to Berlin

BERLIN: German Finance Minister Olaf Scholz plans to temporarily suspend a government “debt brake” to hand out tens of billions of euros to struggling municipalities, weekly Die Zeit reported on Wednesday.

With years of fat budget surpluses, Germany has long faced calls at home and abroad to loosen its purse strings, but the spread of the novel coronavirus and its likely impact on economic growth have given them new impetus.

“Scholz will present a plan in March,” Die Zeit wrote without citing its sources.

Scholz would need two-thirds majorities in both parliament’s directly elected lower house and the upper house representing the states to suspend the debt brake.

Anchored in the German constitution at the height of the financial crisis in 2009, the rule prevents government from running a deficit of more than 0.35 percent of the gross domestic product in normal times.

Finance Ministry spokeswoman Katja Novak declined to comment on “speculation,” telling AFP “the finance minister will present his proposals for dealing with old debt early this year.”

“At present various options are being discussed,” Novak added.

Scholz has long backed plans to lift a near-unbearable burden of repayments from 2,500 municipalities by shifting €40 billion ($43.5 billion) of their debts to Berlin.

He hopes it would lift a major hurdle to increasing infrastructure spending and eliminating financial and planning bottlenecks in municipalities responsible for projects like roads and schools.

Many of the towns affected are in deindustrializing “rust belt” zones, like Germany’s most populous state North Rhine-Westphalia.

After years of a no-new-debts policy known as the “black zero,” economists and EU partners are increasingly pressuring Berlin to upgrade aging infrastructure and stimulate its flagging economy with new spending.

A manufacturing slowdown in Europe’s top economy and the looming impact of the coronavirus have added urgency to such calls.

What is more, the European Central Bank’s monetary policy is already extremely loose, with negative interest rates and mass bond purchases under a “quantitative easing” scheme.

With little room to maneuver in Frankfurt, eurozone governments are on the hook to stimulate flagging economic growth, especially in case of a potential hefty shock stemming from an unforeseen event like the virus.


S&P cuts Australia’s sovereign outlook, affirms AAA rating

Updated 08 April 2020

S&P cuts Australia’s sovereign outlook, affirms AAA rating

  • S&P affirmed Australia’s prized rating but said a downgrade was possible within the next two years
  • Australian long-dated bonds sold off after S&P’s outlook downgrade

SYDNEY: Global ratings agency S&P on Wednesday lowered its outlook on Australia’s coveted ‘AAA’ rating to “negative” from “stable” in anticipation of a “material” weakening in the government’s debt position as it splashes out a large fiscal stimulus package.
S&P affirmed Australia’s prized rating but said a downgrade was possible within the next two years if the economic damage from the COVID-19 outbreak is more severe or prolonged than it currently expects.
Australia is among a handful of countries in the world to boast the best ranking from all three major ratings agencies.
But it has come under a cloud as the pandemic has dealt Australia a severe economic and fiscal shock, with S&P predicting the A$2 trillion ($1.23 trillion) economy would plunge into recession for the first time in nearly 30 years.
This would cause a “substantial deterioration of the government’s fiscal headroom at the ‘AAA’ rating level,” S&P said in a statement.
Treasurer Josh Frydenberg said the outlook downgrade was “a reminder of the importance of maintaining our commitment to medium term fiscal sustainability.”
The government has pledged A$320 billion ($197.73 billion) in fiscal spending, or 16.4 percent of annual economic output, to backstop the economy and prevent a crisis as the pandemic shuts companies and leaves many unemployed.
Some fund managers said Wednesday’s outlook downgrade was unlikely to raise the government’s borrowing costs by much though it could hurt Australian companies whose ratings are dependent on the sovereign rating.
“A large proportion of credit funds are mandated to maintain funds in a specific ratings bucket,” said Asmita Kulkarni, Director Investment Strategy at FIIG.
“With potential widespread downgrades we could see funds being forced to sell-down investment which would result in a widening of credit spreads.”
Australian long-dated bonds sold off after S&P’s outlook downgrade with 10-year yields jumping to 0.967 percent from 0.909 percent at Tuesday’s close.
Economists said they do not expect a rating downgrade prior to the federal budget due on Oct. 6.
It was only in September 2018 that S&P upgraded Australia’s outlook to “stable” from “negative” as the budget came close to balance. The government had even projected a surplus for the current fiscal year and next.
While all those predictions are now under water, Australia’s public debt is still in good shape, S&P noted.
“While fiscal stimulus measures will soften the blow presented by the COVID-19 outbreak and weigh heavily on public finances in the immediate future, they won’t structurally weaken Australia’s fiscal position,” S&P said.
“This expected improvement is a key supporting factor of our ‘AAA’ rating.”