Briefly explained
How does the state actually accept debts?
If you need a loan, go to the bank. But who pays the Federal Government’s debt package? Where the billions come from and how state debt works.
If a private person wants to buy a house, she can borrow the lack of money from the bank. You should be creditworthy and bring equity. Then you put your signature under a loan contract and the bank pays the sum. You have to pay the money back over a period of many years.
If a state like Germany wants to take out loans, the matter is a bit more complex. This is because the capital requirement of some dimensions is larger. The future federal government not only wants to build a house, but also streets, bridges, tanks and much more. Hundreds of billions of euros of additional debts are planned. Where does the money come from and how does state debt make it?
This is how government bonds work
The state is not borrowing the money from a single bank, but on the capital market. That means: with many different investors. The finance minister cannot call them all individually and ask for money. That is why the principle is the other way around: the state itself offers bonds, i.e. debt bonds in the form of securities, and see who buys them. This is what banks, insurance or pension funds do. For the banks, private individuals can also acquire bonds.
In principle, the Federal Republic is constantly selling government bonds – if only to pay old debts due to the proceeds. New bonds are always issued for a fixed term, at the end of which the state has to pay back the money. He also has to pay a fixed annual interest that was defined at the beginning. How high it is depends largely on the general interest rate level (key interest rates) and the creditworthiness of the state. The more unreliable a state appears, the more return it has to offer to find buyers for his bonds. Germany is considered to be very creditworthy and must therefore pay comparatively low interest rates.
Eternal debt cycle
The German federal bonds always run over seven, ten, 15 or 30 years and can also be resold from investors to investors during this period. In addition, there are also federal bodies with a 5 -year term and federal treasures with a 2 -year term. At the end of the term, the federal government must specifically repay these debts. But he does this regularly, in which he spends new bonds again. An eternal cycle. It becomes problematic when the debt level increases so much that the creditworthiness of the state falls, so that new debts are becoming increasingly expensive and the interest burden will be increasingly more difficult to manage.
The debt is always measured in relation to the economic power of a country. The Federal Republic is currently in debt with around 2.5 trillion euros, which corresponds to 63 percent of the annual economic output. This is significantly less than in other countries, the cut in the euro area is 87.5 percent. However, the announcement of the billion dollar debt plans alone was sufficient to drive the returns for German debt papers. The return for ten -year federal bonds rose from 2.4 to 2.8 percent within a very short time.
Source: Stern
