A well-known rating agency has already said it has not been ruled out. Plague of recession and higher debt: is the Triple-A at risk?
There is no more time to waste in Germany, with the economy set to fall into recession for the second consecutive year and the popularity of the Olaf Scholz government in serious crisis (also due to the UniCredit-Commerzbank case).
Finance Minister Christian Lindner knows this well, to the point of having decided to activate the debt lever to avert the worst.
Not a choice is taken lightly if one remembers the German word “Schuld”, which means both “debt” and “guilt”. But a choice foreseen by that mechanism governed by the Constitution itself, which allows the government in office to make additional debt in times of economic weakness.
In this case, the sine qua condition is present: in fact, the country’s crisis is serious, threatening the GDP of all the other economies in Europe.
Germany towards more debt in 2025, respecting the debt brake
Lindner’s plan was reported by the German magazine "Der Spiegel". It was announced that the Minister of Finance intends to raise the debt ceiling for 2025 to 56.5 billion euros, which is 5.2 billion higher than previous estimates. This figure is calculated based on the same law, which allows for the possibility of increasing the deficit by approximately 10% to €56.5 billion in the event of a GDP contraction of -0.2% estimated by the government.
All this, without preventing Berlin from respecting the principle of balanced budget, known as the “ Schuldenbremse ”, which became part of the German Constitution in 2009 and was reintroduced in Germany by Olaf Scholz’s government, after being suspended in the years between 2020 and 2023, first due to the Covid-19 pandemic and, subsequently, due to the war that broke out in Ukraine.
This is the “debt brake”, or rather the law that prevents the federal government and state governments in Germany from making new debts, except in conditions of extreme urgency.
This rule, according to Lindner’s plans, will continue to be respected.
Depressing outlook for German GDP: down for the next 10 years
However, the question must be asked: how are Germany’s coffers really doing? And to what extent will Berlin be able to save the country’s economy while continuing to respect the principle of a balanced budget?
A not-exactly reassuring outlook was published by Ray Dalio, founder of the hedge fund Bridgewater Associates, one of the most followed voices in the world of finance.
From his report, which focuses on forecasts for the main economies of the world, it emerged that the growth rate of the German GDP is expected to record practically negative growth over the next 10 years, equal to -0.5% approximately: "This growth rate is well below the global average, and is in 34th place of the 35 most important economies and 16th in the ranking of the 17 advanced countries".
Ruling out the consequences of exogenous political or commodity shocks, natural disasters, or wars, the report warned that over the next 10 years, “we expect German productivity growth to remain somewhat worse than most major economies,” while debt conditions will also be worse than those of other economies.
Ray Dalio noted that even now, “Germany’s biggest relative problems” are precisely “ its debt and debt service levels, along with its declining labor force.”
It is true that, for now, Germany is characterized by a “low debt burden”: that said, what is also “very low” is the trend of the GDP expected for the next 10 years, equal to a contraction of 0.5% per year, compared to a pace of expansion that, “over the last three years, had been equal to +0.8%, above our longer-term expectations”.
Moreover, even if the debt levels are considered “modest”, both at the government level (67% of GDP) and at the household level (51% of GDP), what worries Ray Dalio is the fact that the figures are “mostly in euros”, an element that “increases the risks, given that this is not a currency that Germany directly controls”.
The analysis also notes that the burden of German debt jumps to 245% of GDP if the debt of financial companies is taken into account, compared to a global average of 236%.
Germany AAA rating safe for now. But Fitch has already issued a downgrade alert
For now, Germany continues to boast the triple-A rating from the main rating agencies.
That said while reiterating that judgment on German public debt, complete with a stable outlook, last month Fitch - which has just rejected the judgment on French public debt - clearly warned that “the medium-term economic growth outlook is weak, reflecting structural challenges that continue to persist”.
Furthermore, the agency said it was likely that “Germany’s potential growth will decline significantly, primarily due to the aging population and, to a lesser extent, the recent energy crisis”.
Fitch also stressed that “forecasts by the Bundesbank, the Ministry of Finance, the Council of Economic Experts of Germany and the European Commission all indicate that potential growth (of German GDP) will decline to the range of between 0.7% and 0.4% in the coming years, compared to the pace of expansion above 1% before the pandemic”.
And if GDP continues to decline, Germany’s debt-to-GDP ratio will necessarily tend to rise. So much so that, last month, the agency announced that it did not rule out a rating downgrade, in the event of a significant loss of competitiveness, which would translate into a further strong revision of the country’s growth outlook.
A negative rating action could also occur with a “significant increase in government debt over the medium term, due to a prolonged period of higher deficits or weaker growth,” the rating agency concluded.
German Bunds, i.e. government bonds made in Germany, are therefore at risk of no longer being protected by the triple A rating from rating agencies?
This would be a real problem for the Eurozone, given that the Bund is considered by the international investment community to be the safe asset of the bloc, as demonstrated by the fact that the spreads of all eurozone countries are determined by comparing the yields of sovereign bonds with those of Bunds.
Economists at ING Economics have already warned that they estimate that 10-year Bund yields will rise to 2.6% by the end of 2025, compared to the current 2.27%, well above the value forecast by Bloomberg consensus.
The outlook is for a rise in German yields in the upper part of the expected range, between 2% and 3%. Also weighing are structural inflation risks. Could Berlin - which is reportedly considering blocking a possible merger between UniCredit and Commerzbank waving the threat of Italian BTPs - soon find itself bowing its head, as France was forced to do?
Original article published on Money.it Italy 2024-10-14 12:59:16. Original title: Perché la Germania sta per dire addio al suo storico rating AAA
