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Saturday, December 10, 2022

The Tale of Two Debtors: Investors Punish London, But Forgive Berlin

The Tale of Two Debtors: Investors Punish London, But Forgive Berlin

by yoruk bahselik

September 30 – Investors leave British assets after the UK government announced plans to drastically increase borrowing to finance tax cuts, but Germany has not received the same punishment, despite its own heavy borrowing.

Germany has presented a 200,000 million euro ($196,100 million) package financed with new loans to pay off the cap on natural gas prices and a reduction in taxes on the sale of the fuel, to protect companies and households from its effects. Can you Energy prices rise after Russia cuts supplies to Europe.

It represents about 5% of Germany’s total GDP, and is equivalent to about half of the country’s financing needs this year, but the yield on its government bonds an indicator of your borrowing costs has gone down

Instead, the British “mini-budget” announcement plunged British stock, bond prices and the British pound, with less than half the German debt to finance tax cuts and energy price caps. Its cut. The Bank of England had to intervene in the bond market to control volatility and reduce yields.

British 10-year borrowing costs are now twice that of Germany, indicating that investors view the two countries very differently.

Germany’s “package is broader in terms of support than notion of the UK mini-budget,” said Annalisa Piazza, a fixed income research analyst. mutual fund investment Management.

The British government’s move to cut the top tax bracket was “one of the market’s main selling points,” he said. The rich are less likely to cut spending due to inflation, prompting markets to question the extent to which Britain’s tax cuts will spur growth, unlike Germany, Piazza said.

In Germany, it is “supporting those segments of the population that can make a difference in terms of spending,” he said.

UK tax cuts have drawn a rare rebuke from FMINot being target-oriented in times of high inflation, and because their budget deficit is likely to remain under pressure even after the energy support measures expire.

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German yields certainly rose sharply in September, though much lower than in Britain. Market reaction to the German plans may also be muted, as investors await more details about when Germany will complete the financing, and how much of it can be raised with long-term debt, which could put further pressure on the markets. Is.

On Wednesday, the German Debt Office had already said it would raise 22.5 billion euros more during the fourth quarter than it initially planned for public spending to tackle the energy crisis. This represents an increase of only 5% for the year. Less than half will be raised with long-term debt

So even before the unveiling of Germany’s extraordinary €200bn package, the government’s borrowing figures were well below the £72bn ($79.98bn) that the UK plans to raise over the next six months, roughly 45 percent for this fiscal year. % growth, which will also be mostly raised through long-term debt.

Gerard Fitzpatrick, director of fixed income at Russell Investments, said he expects issues supporting German spending to spread more than in Britain.

“I think a more sensible, longer-term spending program is somewhat more acceptable to the bond market,” he said.

Also, Germany, which has debt/Gross Domestic Product Far less than the UK, it will raise funds so that it can meet its “debt break”, which places strict limits on new borrowing except in exceptional circumstances.

“The second message is that, behind the protective screens we are putting around us, the debt brake will continue to work: a clear message to the world’s capital providers that Germany remains strong,” the foreign minister said on Thursday. German Finance, Christian Lindner.

(1 dollar = 1.0199 euros)

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