ECB easing hurts German savers but heals state finances

FILE PHOTO: The Brandenburg Gate is seen during sunset in Berlin

By Abhinav Ramnarayan

LONDON (Reuters) – Many Germans see the European Central Bank’s bond-buying scheme and interest rates cuts as subsidizing indebted southern euro zone members at the expense of northern savers, but it has also transformed the finances of Germany’s regions.

The central bank started cutting interest rates in 2008 to help the economy after the global financial crisis and gathered pace as a series of debt crises hit the euro zone in 2011 and 2012.

The monetary easing stepped up a gear when the ECB embarked on a trillion euro bond-buying scheme in March 2015 which pushed borrowing costs even lower.

This punished German savers by driving interest rates to record lows but helped countries such as Spain, Italy and Portugal manage a sharp increase in their debt loads.

It was also good news for the 16 regions and city-states including Lower Saxony, North Rhine Westphalia and Berlin, collectively known as the “Laender”.

The regions have had their debt servicing costs cut by an average 40 percent in eight years, according to ratings agency S&P Global, and have been able to issue long-dated bonds and fix costs at extremely low levels.

“Most German states are running a surplus now and one of the reasons for this improvement is certainly the lower interest rate environment besides robust tax revenue increases,” said Thomas Fischinger, a director at S&P Global.

The ECB’s deposit rate — a closely watched interest rate set by the central bank — has fallen from 3.25 percent in 2008 to minus 0.40 percent. It has been negative since 2014.

Then in 2015 it started to buy billions of euros of bonds every month. This brought down yields and interest payments on government borrowing dropped sharply.

Short-dated bond yields even went negative for countries with higher credit ratings such as Germany, the Netherlands and Austria, so investors were effectively paying to lend to them.

This pushed German regional bond yields lower as investors bought German state debt as an alternative to Bunds.


While German national debt is among the lowest in the euro zone, regional debt is among the highest.

The sixteen have average debts of around 160 percent of revenues. This compares with 5-100 percent for Austrian states and around 20-50 percent for Russian regions, while for Swiss cantons 200 percent would be at the very high end, according to S&P Global’s Fischinger.

    In 2009, they were running deficits of around 9 percent. In 2016, all but one of them ran a surplus partly because of low interest rates. This helped fulfill a national directive to balance their budgets four years earlier than the 2020 goal. Preliminary numbers show North Rhine Westphalia (NRW) ran a surplus in 2016 for the first time since 1973.

    “Our budgetary performance has come as a surprise to some people,” said Axel Bendick, head of funding for NRW. Numbers from the ministry show a 3.88 billion euro increase in tax revenues and a 563 million euro fall in interest payments helped the state shrink its budget by 1.567 billion euros in 2016.

    With worries increasing over a scarcity of eligible government bonds to buy under QE, the ECB in 2016 expanded its purchase program to include bonds issued by government-related entities, including regional debt.    

    Germany’s regional benchmark bond market is the biggest beneficiary, being the largest in Europe. UniCredit analysts calculated the size of the state bond market at 364 billion euros at the end of 2016, seven times the size of the next biggest regional bond market, that of Spain, and comparable to the national debt of Belgium and the Netherlands.  

    The yield on the March 2025 bond of North Rhine Westphalia — with around 52 billion euros of outstanding euro benchmark bonds — fell from 1.19 percent two years ago to 0.40 percent. <DE000NRW0FU3>     



The easing has also allowed German states to issue longer-dated bonds as investors look to buy longer bonds for the extra yield in a low interest rates environment.  

    “We printed our first 30-year benchmark in 2016, and certainly this part of the curve became attractive on the back of the QE program and inclusion,” said Bendick of the NRW finance ministry.

    “We usually have a program of around 20 billion; this has shrunk because of the extension of the portfolio. We don’t have to fund as much in any given year as a result of this.”

    Also, regions’ higher market profile has helped the state increase its borrowing in other currencies: in 2015, it met close to 20 percent of its funding needs in dollars.

This increases the borrower’s funding options and provides access to a new set of investors in case of more challenging times.

The boomtime for German states looks set to continue. NRW and Berlin both received strong demand for recent 30-year bond sales and with the ECB increasingly struggling to find German Bunds to buy, this demand may even increase.

“Given the scarcity of German Bunds, we think that the ECB does not have any chance other than becoming even more active in the German sub-sovereign market,” said Citi strategist Michael Spies.

Graphic: ECB purchases push down yields

(Graphics by Ritvik Carvalho; Editing by Anna Willard)