Federal debt: Small rate hike with a big impact

Hans Joachim Vieweger
ARD Capital Studio

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But that could soon be a thing of the past. Because interest rates are rising. Over time, this should also affect the federal budget, says Reiner Holznagel, President of the Taxpayers’ Association. “Of course we don’t have a problem at the moment because the loans we have now are firmly secured. And the conditions cannot be changed,” he explains. “But in the medium and long term we will face an additional burden. And of course we see that in the federal budget: if interest rates rise, the expenses will also increase in the medium to long term, and that will then be missing elsewhere.”

Turnaround in interest rates for politically critical situation

Otto Fricke, the budgetary spokesman for the FDP parliamentary group, also advises caution: interest rate hikes are critical for politicians because the familiar is coming to an end and one has to adapt to new financing conditions. He sees particular problems coming to countries that have higher debts than Germany. “Because the difference in interest rates and the faster increase in interest rates in Italy or Greece, for example, are the announcement of new problems at European level,” says Fricke.

This brings back memories of the European sovereign debt crisis that started in 2010, to which the European Central Bank reacted with its long-term policy of low interest rates. What drives many savers to despair to this day provided relief for the national budgets.

Debt service is becoming significantly more expensive

Admittedly, as quickly as the proportion of spending on new and old debts in households has fallen, it can rise again just as quickly. “A good ten years ago we had to raise more than 30 billion euros to service our debts,” says taxpayer president Holznagel. “Today it’s almost four billion euros, so significantly less. But if interest rates rise by just one percentage point, that will have an impact of 13 billion on the federal budget.”

This doesn’t happen overnight, but especially in times of low interest rates, small changes can quickly have a big impact – as private borrowers know.

Balancing short-term and long-term debt

And something else is basically the same for home builders and the federal government, adds the FDP politician Fricke: You have to decide for what term new loans are to be taken out. Do you prefer to borrow in the short term – with lower interest rates – or rather in the long term with higher interest rates. “The latter has the great advantage that I have calculable expenses in the household, the former has the advantage that I can curb new debt at this point in the short term,” says Fricke.

Because the yields on one- and two-year government bonds are still negative, the federal government can still earn money with this form of credit. In the case of longer-term bonds, on the other hand, i.e. maturities of five years or more, the time of negative yields seems to be over – and with it the pleasant time for financial policy.