Germany’s public debt spending expected to double

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Due to increasing inflation, servicing government loans in 2023 would cost Germany about twice as much as it does now, German media group Redaktionsnetzwerk Deutschland (RND) said on Friday, citing data from the country's finance ministry on next year's budget.

An error in previous governments' inflation forecasts will cause Germany's interest payments on its public debt to rise from €16 billion ($16.09 billion) to nearly €30 billion next year, as the federal government has been issuing bonds linked to the inflation rate in recent years, according to the report. 

Berlin misjudged the risk of inflation increase, and as a result, it is now required to provide far bigger sums to service these bonds, according to the news outlet. 

“According to the documents for the draft budget for 2023, around €7.6 billion must be reserved for the repayment of so-called inflation-linked bonds in the coming year. This is €3 billion euros more than this year and almost €7 billion more than last year when inflation was still low,” RND reports.

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The sum of such indexed government loans is currently around €65 billion, which is a little under 5% of the country's total public debt of €1.5 trillion, according to the German Debt Office. However, the ratio of these loans to interest payments is significantly disproportionate, amounting to approximately 25%.

According to the research, banks, insurance companies, and entities that have made loans to the German government will benefit the most from the situation since they will earn more money in interest payments. However, German taxpayers are unlikely to be thrilled because the interest would be paid with their money.

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“Betting on infinitely low inflation rates when taking on debt was a mistake that is now becoming very costly for taxpayers,” Dietmar Bartsch, leader of the Left faction of the German Parliament, said, commenting on the situation. He also demanded an investigation into the debt policies of the previous governments.

Nonetheless, despite the high cost of inflation-linked bonds, Germany's government debt expenditure is expected to climb in the future years, according to RND, because interest rates are expected to rise as Europe attempts to combat an economic crisis. The European Central Bank (ECB), for example, is likely to raise interest rates later this month for the first time in 11 years.

Highest inflation rates since 1973

German statistics office Destatis reported another hike in food and energy prices as inflation continues. Europe’s top economy, Germany, has reached 7.9%, the highest level since the 1973 oil crisis.

The surge came as the Ukraine war resulted in the collective-West imposing unprecedented sanction packages on Russia. The sanctions imposed on oil and gas hit Europe the hardest and consequently impacted inflation rates the most since late February said Destatis.

The agencies also pointed out that “another factor with an upward effect on prices” is the Covid-19 pandemic and all the supply chain interruptions it had caused throughout a period of two years.