German government encouraged to borrow more as war approaches

Bond-market message

It’s an unusual stance in an era where governments globally are under scrutiny from so-called bond vigilantes for excessive spending and vast budget deficits. And it’s a tough sell in a country that has long prided itself on fiscal rectitude.

But Germany’s decades of self-discipline have left the country with a limited debt burden, giving it plenty of borrowing power at a time when the economy desperately needs stimulus. And far from punishing the government for borrowing more, investors would welcome increased issuance given the dearth of top-quality bonds in Europe for fund managers to buy. 

From Germany’s perspective, now might be a good time for a new government to kick off additional bond issuance. The nation’s borrowing costs — at about 2.50% for 10-year bunds — remain the lowest in Europe, and stand to decline further with the European Central Bank expected to deliver additional interest-rate cuts this year.

Increased supply of German debt is likely to find demand from pension funds, insurers and banks, which need high-quality, long-term assets. Alongside Germany, the Netherlands and Luxembourg are the only EU countries that are graded AAA from all three major ratings firms.

While it may take higher yields to attract investors, increased German borrowing and spending could ripple through the EU.

“If Germany starts to be a little bit less tightfisted when it comes to spending, that’s going to have a positive impact on the fiscal thrust in Europe over the next few years,” said Mathieu Savary, chief European investment strategist at BCA Research.