Economy

BERLIN (Reuters) – Germany’s constitutional court ruled last week that the coalition government’s decision to reallocate 60 billion euros ($65.21 billion) of unused debt from the pandemic era to its climate and transformation fund (CTF) was unconstitutional.The ruling, however, potentially also affects other off-budget funds that the country has used over the years to finance government policy in order to comply with its self-imposed debt brake restricting the public deficit to 0.35% of GDP.Here are some of the implications for the budget, the economy, German fiscal policy and Chancellor Olaf Scholz’s three-way coalition:WHAT COMES NEXT FOR THE 2024 BUDGET?The ruling did not directly impact the regular 2024 budget, which is due to be voted on by parliament on Dec. 1.Still, it means there is a funding gap for projects that were due to be covered by the CTF and other funds that may be affected by the ruling – both this year and next.If you consider, for example, that the annulled CTF funds were due to be spent by 2027 that implies a gap in funding of about 10-20 billion euros per year, according to Scope Ratings.As such, Scholz’s coalition of his Social Democrats (SPD), the Greens and the Free Democrats (FDP) could end up making alterations to next year’s budget, currently amounting to 446 billion euros.The government looks set to postpone talks planned for Thursday on the 2024 budget as it struggles to figure out solutions.Some politicians from the fiscally hawkish FDP have argued in favour of cutting some social expenditure – a move to which the centre-left SPD and Greens object.The government currently looks likely to suspend its debt brake for 2023, five government sources told Reuters. That however does not necessarily account for the funding gap next year and it is unclear if the government might suspend the brake again.Germany can suspend the debt brake if it is hit by a natural disaster or “exceptional emergencies” that are beyond the control of the state and significantly affect its finances. The question is whether the current circumstances can be considered an “exceptional emergency” – and whether or not the FDP agrees to a suspension.WHAT PROJECTS ARE IN JEOPARDY?The government has been relying on the CTF to finance much of its agenda to support industry, keep it competitive and transition towards a carbon neutral economy.German industrial projects in jeopardy from the blow to the CTF include chip factories, decarbonised steel production and expansion of the battery supply chain, according to government sources.Projects that had been expecting state support include a planned TSMC chip plant, an expansion of an Infineon (OTC:IFNNY) plant in Dresden and an Intel (NASDAQ:INTC) plant planned for Magdeburg. WHAT CAN HAPPEN WITH OTHER SPECIAL FUNDS?There are currently 29 special funds at the federal level, with a total volume of 869 billion euros, according to the independent auditing institution Bundesrechnungshof.Several of these could be at risk from last week’s verdict although it is still not clear which, with the exception of the 100-billion special fund for Germany’s army that is covered by a separate constitutional exemption from the debt brake.Berlin has blocked spending from the 200-billion euro Economic Stabilisation Fund for this year and wants to close it by year-end, a government source told Reuters on Tuesday. HOW WILL IT AFFECT GERMAN FINANCIAL POLICY?Germany has in the past few years used what some analysts call accountancy tricks to get around its debt brake, which it introduced in the wake of the global financial crisis of 2008/09 to avoid excessive debt.The ruling indicates that Berlin will in the future have to stick more closely to the spirit of the brake – or reform it altogether.”The debt brake in its current form is not suitable for the challenges of the future, as the constitutional court ruling … has shown,” said the leaders of the SPD parliamentary groups in the Bundestag lower house, European Parliament and states. WHAT ARE THE CONSEQUENCES FOR THE GERMAN ECONOMY?The ruling and its fallout could drag economic growth down by as much as half a percentage point next year, an economy ministry source told Reuters on Friday. Last month, the economy ministry predicted 1.3% growth for next year.In the long-term, the 60-billion euro hole will make structural changes harder and hence increases the likelihood of a longer stagnation, ING’s economist Carsten Brzeski said.Scope Ratings said it already estimated German under-investment at around 300 billion euros over the past decade vis-à-vis other AAA-rating economies.WHAT WILL BE THE IMPACT ON RULING COALITION?The ruling has already heightened tensions in Scholz’s fractious three-way coalition, which has seen support slump since taking office nearly two years ago as it tackles a series of crises, in part due to public infighting.Just a third of voters would vote for the parties of the coalition if an election were to be held now, according to the latest survey by pollster Forsa. And some politicians from the coalition parties say they are not sure it makes sense for it to them to continue governing together.But the parties are likely to hammer out a compromise no matter how great their divisions, analysts say, because they would all stand to lose from a fresh election, and no workable new majority appears possible in the current parliament.Other coalitions have also faced speculation they would fall apart, say analysts, but the last time one did was in 1982, when SPD leader Willy Brandt was forced to resign after a close aide was exposed as a spy for Communist East Germany. More

Berlin had agreed subsidies worth nearly 10 billion euros with the U.S. chipmaker, a person familiar with the matter had told Reuters when Intel announced its plans.”When Germany cannot afford such future projects like Intel anymore, then the economic damage will be enormous and the image damage gigantic,” Sven Schulze, economy minister of Saxony-Anhalt was quoted as saying. More

BERLIN (Reuters) -German Chancellor Olaf Scholz’s government looks set to delay talks on next year’s budget as it struggles to find a way out of a deepening crisis caused by a court ruling that has forced a freeze on new spending pledges.A delay to the talks – scheduled for Thursday – would underscore the challenge facing the government after the country’s constitutional court blocked a move to transfer 60 billion euros ($65.44 billion) in unused funds from the pandemic to green investments.In a bombshell ruling last week, the court ruled the budget manoeuvre was incompatible with the debt restrictions enshrined in Germany’s constitution. The three parties in Social Democrat (SPD) Scholz’s uneasy coalition with the Greens and pro-business Free Democrats (FDP) are trying to hammer out a solution to keep as many spending pledges as possible – and make them legally compliant.With talks among politicians from all parties going on through the day, options include drawing up a supplementary budget for 2023 and suspending Germany’s self-imposed debt brake before reinstating it for next year. An email seen by Reuters from the head of the budget committee of the opposition conservatives, asked other members of the committee if they objected to cancelling Thursday’s planned talks to thrash out next year’s spending plans.Such a move would probably mean next year’s budget could not go to the Bundestag lower house of parliament next week which could increase uncertainty about spending in all areas of the German economy. Highlighting the gravity of the situation, the government has already imposed a freeze on most new spending commitments. It has also blocked spending from the 200 billion euro Economic Stabilisation Fund for this year, a letter seen by Reuters showed, and a government source told Reuters the government wanted to close the fund by the end of the year.Almost every item of spending that has not yet been formally approved is up in the air. Among the uncertainties is aid for Ukraine. The government had planned to double military aid to Ukraine to 8 billion euros next year.INDUSTRY URGES CLARITYGreens Economy Minister Robert Habeck has warned that Germany’s place as an investment hub is at stake, as well as jobs, and industry chiefs have called for clarity quickly.”German industry is looking at the current political situation with the greatest concern,” said Siegfried Russwurm, president of the BDI industry association.The influential VDA autos association, which represents giants like BMW (ETR:BMWG) and Volkswagen (ETR:VOWG_p) as well as smaller suppliers, urged the government to provide a clear, reliable basis for planning as quickly as possible. The government must be “more committed and determined than before in pushing ahead with energy partnerships and trade and raw materials agreements to strengthen Germany as an industrial location,” a spokesperson for the VDA said.Trying to inject some reassurance, one government source told Reuters that the government would continue with its modernisation and economic transformation.”This will not be called into question by the budgetary difficulties,” said the source.So far, Berlin has stuck by an agreement for 10 billion euros in subsidies with U.S. chipmaker Intel (NASDAQ:INTC), which will develop two chipmaking plants. A government source has told Reuters suspending the debt brake, which was lifted between 2020 and 2022 to cushion the impact of the COVID pandemic and Russia’s invasion of Ukraine, would have to follow guidelines set out in the court ruling.Finance Minister Christian Lindner has been reluctant to reform the debt brake, which restricts Germany’s structural budget deficit to the equivalent of 0.35% of gross domestic product. His pro-business FDP are strong advocates of fiscal discipline and low taxes.($1 = 0.9168 euros) More

Minister after minister have delivered the bad news as the import-dependent Communist-run country weathers a fourth year of crisis, scraping by with a minimum of foreign exchange as output plummets.Food production, the supply of phamaceuticals and transportation are down by at least 50% since 2018, the top officials said, and continued to decline this year in large part due to chronic fuel shortages and power outages.Cuba imports most of the food and fuel it consumes, but revenues have plunged following the pandemic, hampered by stiff U.S. sanctions and floundering tourism, once a mainstay of the Caribbean island economy.”The ministers provided new information revealing just how serious the crisis is and that growth this year is very doubtful,” Cuban economist Omar Everleny said. Production of pork, rice and beans – all staples on the Cuban dinner plate – are down by more than 80% this year over pre-crisis levels and eggs 50%, Agriculture Minister Ydael Jesus Perez said. “It has only been possible to acquire 40% of the fuel, 4% of the fertilizer and 20% of the animal feed required,” the minister explained.Hospitals, short on basic supplies such as sutures, cotton and gauze, have done 30% fewer surgical procedures compared with 2019, according to data shared on state-run TV during a presentation by First Deputy Health Minister Tania Margarita Cruz. Nearly 68% of basic pharmaceuticals are not available or in short supply. Public transportation, vital in a country where few have vehicles, has also been hobbled by fuel shortages and difficulties in obtaining spare parts.If before the collapse of former benefactor the Soviet Union “there were 2,500 buses operating in Havana … today there are just 300 compared with 600 four years ago,” Transportation Minister Eduardo Rodríguez Davila said.The ministers revealed domestic freight traffic continues to decline and is half of what it was in 2019. Industry is operating at 35% of capacity. Cuba’s government has acknowledged its state-run economy needs reform. Local authorities, increasingly under pressure as the problems and tension ratchet up, have launched programs to contain hunger, build homes and improve the flow of transportation, but remain hamstrung by a lack of funds, they have said. More

The IMF highlighted that medium-term growth could surge to approximately 5% per year, bolstered by heightened liquefied natural gas (LNG) production and the implementation of reforms under the National Development Strategy 3 (NDS3). These reforms are geared towards achieving the goals set forth in the National Vision 2030. The Qatar Central Bank (QCB) has played a pivotal role in maintaining price and financial stability by tightening monetary policy in line with the US Federal Reserve, which has helped moderate inflation.In recent economic developments, Qatar’s Planning and Statistics Authority reported that October year-on-year inflation rose over two percent, influenced by sectors such as communication and food. Despite this uptick, the QCB has successfully managed to keep price and financial stability intact amidst rising non-performing loans. Macroeconomic measures have been enhanced, focusing on bank risk mitigation against short-term external asset-liability mismatches within a prolonged high-interest rate environment.The IMF’s findings also suggest that Qatar’s fiscal strength for fiscal years 2022-2023 has been fortified by sizable hydrocarbon windfalls. Looking ahead, fiscal prudence is projected for the upcoming 2024 budget cycle, with inflation expected to stabilize at two percent due partly to these windfalls.The economic normalization post-World Cup is further supported by activities related to the North Field project and a tourism boost associated with hosting the tournament. These factors are anticipated to significantly contribute to Qatar’s economic expansion over the next few years.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Investors are pouring cash into US corporate bond funds at the fastest pace in more than three years, signalling a growing appetite for risky assets as markets call the peak in interest rates.More than $16bn has flooded into corporate bond funds in the month to November 20, data from flow tracker EPFR shows, already a larger net inflow than any full month since July 2020. The trend has been concentrated mainly in “junk” debt, with $11.4bn flowing into funds investing in these low-grade, high-yield bonds this month. Another $5bn has poured into investment grade funds, which hold better quality corporate debt.The substantial inflows underscore how cooling inflation has fuelled predictions that the US Federal Reserve has finished its cycle of interest rate rises. The clamour for lower-rated bonds also reflects growing confidence that relief from high borrowing costs will allow highly indebted companies to navigate a slowing economy without a surge in defaults.“We have seen a very big change in sentiment across markets,” said Will Smith, director of US high-yield credit at AllianceBernstein. Smith added that a “massive relief rally” in US Treasuries, as investors race to close out bets on further price declines, had been echoed in corporate debt.The Fed has turned the screws aggressively on monetary policy since March last year, taking borrowing costs from near zero to a target range of 5.25 per cent to 5.5 per cent in a bid to curb inflation. That has translated into a greater interest burden for corporate America — sparking concerns about a wave of defaults as riskier businesses struggle to service their debt.However, the Fed has held rates steady since July. And closely watched labour market data for October showed a substantial slowdown in hirings, with just 150,000 new US jobs created — beneath forecasts and much lower than the prior month’s number. Last week, data showed that inflation had slipped more than expected to 3.2 per cent — the first decline since June.In response, traders have slashed their expectations of another rate rise before the end of the year, with futures markets pricing in two cuts by July — even as the central bank has signalled it may need to keep borrowing costs higher for longer.The shift in the outlook for interest rates has boosted corporate bond valuations. The average premium paid by US investment grade borrowers above US Treasuries sits at 1.17 percentage points, Ice BofA data shows, down from 1.3 percentage points as recently as November 1. Average junk bond spreads have narrowed more sharply, from 4.47 percentage points to 3.95 percentage points.November’s inflows come after high-yield funds suffered more than $18bn of outflows in the year to October 31. Some economists and investors worry that the fresh flood into corporate debt markets could reverse again, if it becomes clear that borrowing costs are to remain high for the foreseeable future — helping to push down bond prices and fuel a widening of credit spreads.“I think you’re seeing investors rush into fixed income, thinking that we’ve seen the highs in interest rates because of a few data points,” said John McClain, portfolio manager at Brandywine Global Investment Management. “I think that’s kind of foolish, frankly,” he added. “This feels very similar in terms of market movement to both 2019 and 2021, where we saw material ‘melt-ups’ into the end of the year — risk-chasing.”The lowest-rated companies in the high-yield index would be most vulnerable in a “higher for longer” scenario, according to Apollo chief economist Torsten Slok. “They have more leverage, they have lower coverage ratios, they have weaker cash flows,” he said, meaning that default rates may continue to increase. November’s inflows indicate that “the pendulum is certainly [swinging] in the direction of saying, ‘hey, inflation is behind us and everything is fine’,” Slok added. “The problem with that is that the pendulum can very, very quickly swing back” if a well-known company defaults on its debt, he added. More

The report, which was released today, calls for heightened vigilance in the face of these difficulties. Luis de Guindos, Vice President of the ECB, emphasized the importance of reinforced macroprudential policies to safeguard against market sensitivities and vulnerabilities within non-bank financial institutions.Despite some gains for banks due to higher interest rates, they are battling against soaring operational costs and worsening asset quality. The tightening credit environment has led to reduced lending activity, further complicating the situation for banks. However, their resilience is supported by macroprudential authorities’ mandates for enhanced buffers.The residential property sector is facing a downturn as a result of increasing mortgage expenses, while commercial real estate is struggling with reduced demand in the aftermath of the pandemic. In response to these challenges, the ECB is advocating for the full adoption of Basel III reforms and the completion of the banking union to fortify the financial system’s robustness.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More