Corona Crisis: The explosion of public debt during Covid-19

With the Corona crisis, the debts of the states are rising massively. Now the debt clock is ticking again in Germany. After years of black zero and a drop in Germany’s national debt towards the Maastricht criterion (60%), Covid-19 also brings about a turnaround for Germany. The lockdown and the enormous economic effects make rescue packages of an unprecedented size necessary. This will also cause Germany’s debt to soar again. But it will be far less than elsewhere, as the comparison with other countries shows.

Corona Crisis: The European Central Bank steps on the gas

Similar to the Federal Reserve in the USA, the European Central Bank has launched a huge rescue package of 750 million Euros to cushion the consequences of the corona crisis. Last week, they really got down to business, buying up bonds in the record amount of 45 billion Euros. This included purchases of 34 billion in the programme to tackle the corona crisis, with the upbeat acronym PEPP (Pandemic Emergency Purchase Programme). This brings the total amount of purchases in April to 103 billion Euros. Was this large sum perhaps also in connection with the ruling of the Federal Constitutional Court in Karlsruhe (Germany) on the merits of the bond purchases?

A financial analyst from Pimco already expressed doubts as to whether the planned total amount of 750 billion Euros would even be sufficient until autumn. After all, funds of about 153 billion Euros had already been used within the framework of the emergency programme. The European Central Bank has focused heavily on Italian bonds, but their yield has not fallen very far below the 2 percent mark.

Just how easily Germany can still raise money on the capital markets was demonstrated by an issue this week. On May 6 the German government placed a 15-year government bond for the first time at a zero coupon and a volume of 7.5 billion Euros. Very successful, because there was a demand of 33.5 billion, the government still earned money (price 104.659) and it is planned to increase this bond by 10 billion Euros in June.

The increase in public debt

But what happens to the national budgets of the countries as a result of the exorbitant debt programs? Here is an overview of the IMF’s forecast for debt development in 2020. Increases in percentage points compared to 2019:

  • Japan plus 14.5 PP corresponding to 252 percent of gross domestic product
  • Italy plus 20.7 PP – 156 % to GDP
  • USA plus 22.1 PP – 131 % to GDP
  • France plus 16.9 PP – 115 % to GDP
  • Canada plus 20.9 PP – 110 % to GDP
  • Great Britain plus 10.1 PP – 96 % to GDP
  • Germany plus 6.9 PP – 69 % to GDP
  • China plus 10.5 PP – 65 % to GDP
  • Worldwide, debt is expected to increase from 83 to 96 percent. If that is not even a very optimistic estimate!

Corona Crisis: Heavy new debt beyond the stability criteria

The period of budget surpluses is thus coming to an abrupt end for Germany as well. With an estimated 5.5 percent new debt, Germany is even moving farther away from the Maastricht criterion of 3.0 percent. At the same time, after years, the debt clock for Germany is beginning to tick again in the corona crisis. But compared to other countries, Germany is still doing really well in this respect. Here is an overview of the estimated debt deficits for this year

  • USA, new debt 15.4 percent
  • Canada -11.8 percent
  • China – 11.2 percent
  • France – 9.2 percent
  • Italy and Great Britain – 8.3 percent
  • Japan – 7.1 percent
  • Germany – 5.5 percent

Germany is therefore also (still) in a relatively moderate range here. As far as government measures against the coronavirus are concerned, in terms of loans and guarantees, however, the Federal Republic of Germany alone is on a wide front.

Compared to GDP:

  • Germany 32.2 percent
  • Great Britain 15.0 percent
  • France 12.4 percent
  • Spain 8.0 percent
  • Italy 7.3 percent
  • USA 4.0 percent

Bottom Line

How do most states want to escape from this debt dilemma?

Will it be possible to afford significant interest in future financing? Is it even possible for industrialized countries to grow out of this level of debt? Or is there perhaps a solution in the form of the much-discussed debt cut by the central banks, with the writing-off of bonds and their removal from the balance sheets? These are all questions that are not yet relevant. Rescue is the first priority in the Corona crisis, but will soon be on the agenda.

It has been tried for a decade: to get out of debt after the financial crisis with the help of so-called financial repression. It has not worked in most countries. This is what Mario Draghi in the Eurozone had to find out for years. By lowering interest rates on savings below the rate of inflation with the aim of boosting the economy. At the same time reducing relative public debt, with correspondingly high economic growth. Not even when minus interest rates were introduced, many Germans even increased their savings rate as a result.

After the corona crisis, will another attempt of Repression 2.0 be launched first?

In der Coronakrise steigen die Staatsschulden massiv an
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