While politics and administration work on the upper floors and the Bochumers go about their daily work, a stately piled-up time bomb is ticking in the depths of the town hall cellar. Hardly anyone is still talking about Bochum’s billions in debt, on which the whole city sits relaxed and seems to be sleeping peacefully. If a pen clicks in Frankfurt, the explosive device detonates in Bochum. The city will never repay these sums. Should the key interest rate rise, the financing of the budget will collapse with a short latency. An old debt fund alone would be a way out.
The city’s debts are made up of two types of credit that private individuals are familiar with in one way or another. There are regular loans that are taken out for permanent financing. Private individuals know this as a personal loan, car loan or even as construction financing. In addition, there is the overdraft facility, which allows private individuals (or women) to overdraw their account at short notice to cover temporary bottlenecks. In the city, the overdraft facility is called a little different, namely cash credit.
The city of Bochum has a debt of 1.8 billion
The total municipal debts of Bochum thus amount to around 1.8 billion euros, 710 million of which are cash advances. You would have to convince the 86 millionaires in Bochum (as of 2017, IT NRW) to donate all of their income for the next 21 years to the treasurer in order to get to plus-minus-zero. If the city were an over-indebted private household whose loans were canceled, the citizens, as guarantors, would still have to transfer EUR 4,867 per capita (as of March 31, 2021) to the creditors.
Good news will be announced again this year, namely an annual surplus of EUR 48.6 million (annual financial statements 2020), but measured in terms of total debt, this is not just a) the famous drop in the bucket, b) actually eaten up by the corona costs of EUR 50.4 million, which will have to be paid off over the next half century, and c) has not been achieved through a structural performance of the urban financial planning.
The consequences of interest rate hikes would be fatal for the city
The thickest kettledrum in the year-end orchestra of the ringing champagne glasses is contributed by the cryptic item “General Finance”. When the long-term financial planning of the finance department was drawn up, the low interest rates were not yet foreseeable. If you are in the billions in the chalk, then every percent makes “the cabbage fat”. It is therefore very convenient that the ECB has waived interest for years. Money at the central bank costs the commercial banks zero, nothing, Nada. “Interest has been abolished,” commented the President of the Hessian Savings Banks and Giro Association at the beginning of 2021.
Now this is no favor from the then ECB boss Drahgi to today’s Bochum boss Eiskirch. Rather, the aim was and is that the commercial banks can offer companies cheaper loans so that more can be invested and consumed. This is a monetary policy measure to prevent the economy from collapsing in the wake of the financial market and euro crisis. The municipalities are also happy to take this affordable offer with them.
But how long does the trip to the land of milk and honey take? The ECB’s low interest rate policy will have to come to an end at some point. The real estate market is already considered overheated because investors in concrete gold are fleeing. The retirement provision of small savers will continue to be eaten up. At 3.8%, inflation in Germany has currently reached its highest level since 1993. In the preliminary report of the 2020/2021 Bochum budget, the finance department said that “the signs of a turnaround in interest rates are increasing”.
Should the ECB turn around in Frankfurt, this will have massive effects. Companies and banks that still have a pulse due to the expansionary monetary policy are considered zombies. If the interest rate rises, these alpine-sized risks begin to falter. Bochum could also be counted among the genus of zombies – but one of the particularly slow zombies. The finance department tries to secure the low interest rates as much as possible with its debt management. Compared to interest rate hedges, which you know from your construction loan, where lines run well and happily for more than 15 years, long-term interest rate hedges apply to municipalities for as little as 5 years. 95% of municipal loans are secured for 5 years. The debt management report is silent on exactly how long these are secured. More than half of the expensive cash loans have fixed interest rates for less than 5 years. A break through of interest rates is only postponed as long as the source of danger itself, the high debt, is not removed. In case of doubt, the consequences can then be shouldered by future generations, who also inherit the climate costs.
Solution old debt fund
Will the city repay this debt? No. Even if Mayor Eiskirch said, “The city is now getting by with the money it earns,” not a penny or a penny of the debt is repaid. An old debt fund alone, in which higher political levels participate in the repayment of municipal debts, is a realistic scenario.
After all, in Germany it is legally impossible for municipalities to go bankrupt. American horror news about insolvent comings, as in the case of New York in 1975, and a government shutdown you won’t have to read in this country. You can still calmly open the door when the doorbell rings, because you don’t have to count on Moscow debt collection – but anyone who thinks that the debts would have no effect on his life will cut himself centimeters deep into his own flesh. A lot of expenses that still flow into the areas of road maintenance, bike path expansion, school equipment, swimming pools and daycare expansion as well as the social area will then flutter into the coffers of the banks.
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