Increased Federal Debt: Received Revenue from New Debt Falling Short of Anticipated Amounts
The German government, under the leadership of Chancellor Friedrich Merz, has announced an updated bond issuance plan and a revised budget for the current year. The Financial Minister, Lars Klingbeil, presented the updated plan in the Bundestag on September 16 and 18, 2025.
According to the updated plan, the German government's financial agency aims to raise 90.5 billion euros through the issuance of German bonds in Q4, an increase of 15 billion euros from the initial plan. Part of the Q4 bond issuances will be in the form of a seven-year instrument next month, while another part will be in the form of Treasury bills.
The increased borrowing is expected to push up yields on German bonds, potentially affecting corporate loans and mortgage rates for homeowners. If yields on German bunds increase, these financial products could become more expensive for consumers and businesses.
The government expects the net new debt this year to reach around 143 billion euros and to grow to nearly 175 billion euros by 2026. Persistently higher yields for the German state would pose a long-term problem, as the nominal interest rate on newly issued bunds would have to be increased.
The escalation in government debt poses the risk of pushing up yields on German bunds. This increase in bond issuance follows a 19 billion euro increase in the third quarter, and over time, an increasingly larger portion of the federal budget would have to be allocated to debt interest, rather than actual expenditures.
The delay in passing the budget was due to the Bundestag election in February that brought Chancellor Merz's Conservatives to power. The government, under Chancellor Merz, has abandoned years of fiscal discipline to fund a massive increase in military spending and infrastructure modernization.
The members of parliament are set to approve the financial plan for the next year in December, which includes record investments of around 130 billion euros. The spending plan presented by Klingbeil has a "clear focus" with three main priorities: investing, reforming, and consolidating.
The final vote on Finance Minister Lars Klingbeil's budget for this year is scheduled for tonight in the Bundestag. The total debt for the year is revised to 425 billion euros, an increase of 45 billion euros from the originally announced figure in December.
German bonds fell slightly, causing the yield on 10-year bonds to rise by one basis point to 2.69%. Despite the slight increase, the German government's bond market remains one of the safest and most liquid in the world.
In conclusion, the German government's increased bond issuance and revised budget for the current year reflect a shift in fiscal policy towards increased spending and borrowing. The potential risks and consequences of this shift, including the impact on yields and debt levels, are significant and will be closely watched by investors and economists alike.
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