How Germany benefited from the debt crisis?

Tue, 24 Jul Pre-Open

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The financial crisis in Euro Zone took a huge toll on the economic growth of member countries. Many countries piled on huge debt and are struggling to repay the same. However, surprisingly, one country has emerged as a clear beneficiary from the current mayhem. It is Germany. Lack of investment alternatives and strong financial health has made Germany an attractive investment destination.

Considering that most member countries are soaked in debt, investors are fearful of their repayment capacity. For instance, countries like Spain and Italy have to offer higher interest rate, to sell their debt, to reflect the inherent risk of nonpayment. On the other hand, by the virtue of being financially sound Germany is able to attract funds at very low interest rates. Thus, being a safe bet, investors are willing to invest in the country. It may be noted that recently the country sold its 10 year debt at an interest rate of about 1.5%. Virtually zero default risk on its debt has enabled the country to raise billions of Euros at miniscule rates.

Now, let us see how this is beneficial to Germany. First, raising money at lower rates, than those prevailing in the market, results in natural savings. For instance, in 2009 the government forecasted that it would have to spend 52 bn Euros to service its debt in 2013. Now, the government expects the figure to be only 20 bn Euros. Reduced interest outgo means that the government can balance its deficit targets without resorting to austerity measures. Secondly, having the ability to attract money in such an environment where liquidity is hard to come by also benefits the government. It is believed that the country has already attracted a windfall of 100 bn Euros amidst the current debt crisis. This gives the government an opportunity for additional spending or reducing its debt.

However, there are also some risks attached with the benefits that are coming in. For instance, if the current crisis escalates and any member country abandons the Euro Zone, Germany will have to suffer the most by the virtue of being a heavyweight in the European block. It will have to offer loans and guarantees to the exiting countries and also inject money into the rescue funds pool that is created for the ailing members. This would mean additional cash drain for the country.

Also, once Eurozone is out of the current turmoil the interest rate on German debt should increase as investor risk perception towards bonds of other countries would change. Thus, the current interest savings are not perpetual.