Fear of a new debt crisis: Growth must be enough for the financial markets

Germany is one of the countries with the most solid financial policy in the world. Only about a dozen countries receive the top rating as debtors from the major rating agencies - the Federal Republic has been one of them for years. Nevertheless, Bundesbank President Joachim Nagel recently warned: “We have to work hard” to maintain this status, “and that will certainly be a challenge for the federal government.” This raises questions: What is a country rating, what significance does it have for local politics and the economy?

The grade AAA (“Triple A”) is top. Usually only a few countries get them, for example Switzerland, Luxembourg, the Netherlands, Norway, Australia and Germany. “The agency rating is a sign of the creditworthiness of the issuer of a government bond, for example,” says Markus Demary from the German Economic Institute (IW) in Cologne. The assessment is given by the agencies Standard & Poor’s, Fitch, Moody’s and Scope, among others.

This process has certain similarities with the ratings that private individuals in this country receive from Schufa. Anyone who has good credit can get a loan. If the forecast is bad, the bank or dealer may say no. At the sovereign level, “ratings are an important factor that determines the interest rate, price and yield of government bonds,” explains Demary. Without these debt securities, nothing often works. Virtually all countries sell them to international banks, insurance companies and investors in order to raise money - or at least would like to do so.

A rating is a complex matter. It is not just the absolute level of national debt that is crucial for the valuation of federal bonds issued by the German Finance Agency in Frankfurt am Main. There is also a lot of data - economic growth, wage levels, the situation of social systems, unemployment, inflation, exports, imports, productivity, investments and, above all, future prospects. Because the buyers of government bonds, the creditors, are only interested in this: What profit can they make from the securities in the future?

The rating is the result of an analysis of economic development. And how is Germany doing right now? For example, the finance agency now has to offer a higher interest rate so that investors buy the government securities. It is now three percent per year for a federal bond with a ten-year term. Previously it was only two, one or even zero percent. But Germany is still comparatively well off: France and the USA are already forced to pay between four and five percent interest.

“The interest rate that the Federal Finance Agency has to offer is currently rising because investors on the global financial markets are more worried about states potentially having too much debt,” says IW economist Demary. Thanks to the investment programs of the black-red coalition, public borrowing is also increasing significantly in this country. The debt ratio in relation to gross domestic product is now around 64 percent. However, France and the USA are significantly higher, each at close to 120 percent.

So is the federal government increasing the debt too much? Friedrich Heinemann from the Center for European Economic Research (ZEW) in Mannheim warns more vehemently than Bundesbank President Nagel: “The rating is actually in danger because the federal government has abandoned the debt brake.” He complains about a “loss of financial policy control: the sector exemption for defense allows unlimited debt.” By this, Heinemann means the decision that the larger part of military spending can be financed with additional loans until further notice. So creditworthiness drops and interest rates rise. “The federal government should counteract this as quickly as possible by increasingly paying for defense spending from the current budget,” demands the ZEW economist.

On the other hand, Jens Südekum, an economics professor at the University of Düsseldorf, who advises SPD Finance Minister Lars Klingbeil, comments in a much more relaxed manner: “The immediate trigger for the recent interest rate increases is the situation in the Middle East and the fear of a new energy price shock.” And it is positive that the local economic growth is now increasing as a result of the considerable government investments, says Südekum.

This is an indication of a crucial circumstance. The debt causes costs in the form of interest that the state has to pay. By 2030, these will already grow to over 80 billion euros in the federal budget, more than ten percent of the entire budget. And if the rating deteriorated, this item would continue to increase. But investors on the international financial markets are primarily interested in: Will they get the money they loaned to the German state back, plus profits - and can Germany bear these costs well thanks to sufficient future growth? The answer to this question is open - and with it the answer to the future of Triple A.