Germany Sells More Debt As Tax Revenues Fall

by Ulrika Lomas, Tax-News.com, Brussels

16 May 2003

As tax revenues continue to fall, the German government may be forced to sell 75% more bonds than originally planned this year in order to finance an increasingly voracious borrowing requirement. However, this is likely to push the economy further beyond the EU's Growth and Stability Pact debt ceiling.

With the government preparing to release its 2003 tax income forecast, Ruediger Parsche, a member of the governmental tax panel, predicted that tax receipts could come in EUR15 billion lower than previous estimates as slow growth and rising unemployment begin to bite.

However, even as Germany issues more debt to finance its borrowing, it is finding that demand for bonds is dwindling. A EUR5 billion issue of five year notes this week drew EUR6.4 billion in bids resulting in a bid-to-cover ratio of 1.3. This is the lowest level since 1997 according to research firm Stone & McCarthy.

Investment bank UBS Warburg estimates that tax revenues slumped 5.1% in the first quarter of this year whilst spending may have increased by as much as 4.1%, way above the 0.4% that the government had budgeted for.

Despite these gloomy figures, ratings agency Standard and Poor's affirmed an Germany's AAA rating last week. However, S&P analyst Kai Stuckenbrock told Bloomberg that the country was amongst the weakest economies in the top tier of ratings, with its total debt of 65% of GDP standing way above the AAA average of 45%.

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