Category Archives: Germany

VAT cuts

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Interesting, the tax cut is a baby step towards adding to aggregate demand, but restaurants?

They judge success of their economy by how many people eat out rather than eat at home?

And the UK needs to eliminate all VAT ASAP, and not fool with minor cuts.

The eurozone can’t do it without triggering the insolvency of their national governments.

Germany Will Support French VAT-Cut Initiative on Restaurants

Jan 20 (Bloomberg) — Germany is willing to support a French initiative to reduce value-added tax on some labor- intensive industries including restaurants, Finance Minister Peer Steinbrueck said, opening the door for a Europe-wide agreement.

“There’s a certain willingness to compromise from the German side for certain sectors,” Steinbrueck told a press conference in Brussels today. “I see the strong public demand in France and I don’t see a reason to reject” the idea.

France failed to win European Union approval to reduce VAT at restaurants in December. Successive German governments had blocked the initiative since at least 2002. European leaders will discuss in March whether to overhaul the sales-tax system.

“We have the basis for solid agreement with our German partners,” French Finance Minister Christine Lagarde told reporters after meeting with Steinbrueck in Brussels.

Currently, some EU member states may apply reduced tax rates on certain goods and services. EU leaders will have to decide whether to extend permission to all EU countries to lower VAT for locally-provided labor-intensive services on a permanent basis.

“It will be discussed for the first time in three weeks” and “finalized in March,” Steinbrueck said. “I’m happy that a number of member states are supporting” this effort. Still, “There haven’t been any promises. Everything’s possible,” he said.

The U.K. announced a 12.5 billion-pound ($17.5 billion) cut in its VAT in November to spur consumer spending.

John Lewis Partnership PLC, owner of the U.K.’s largest department-store chain, reported “much stronger” sales in the first four days after the reduction of the sales duty to 15 percent from 17.5 percent. Still, the number of shoppers dropped by 1.7 percent over the first December weekend, compared with the year-earlier period, according to data compiled by Experian Plc.


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Re: Auction result history in Germany

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(email exchange)

Thanks, Dave, as we thought, the ECB isn’t involved. The CB is an arm of the national government, so, when they do sell the excess securities, the government is then and thereby funded without ECB involvement of any kind. A more serious ‘failure’ would be when the dealers won’t/can’t buy the excess from the CB.

>   
>   Warren,
>   
>   In terms of Germany’s failed auction, the
>   German Central Bank at their discretion will call
>   up one of leading primary dealers and sell the
>   bonds they bought at the auction directly to
>   the dealer. According to ML, they hold bonds
>   back in every auction so they have quite a bit
>   of flexibility to sell other bonds they hold in
>   their portfolio in order to meet the auction
>   shortfall if necessary. I am getting some
>   history for the last year on German auction
>   results and will pass it along when I get it.
>   

>   
>   On Fri, Jan 9, 2009 at 8:13 AM, Dave wrote:
>   
>   Average amount of bonds bought by German
>   Central Bank (BBK) over last 12-15 auctions:
>   
>   2yr: 1.2 bb vs. average announced
>   issue size of 7.2 bb, 17%
>   5yr: 0.7 bb vs. average announced issue
>   size of 5.3 bb, 13%
>   10yr: 1.5 bb vs. average announced issue
>   size of 6.7 bb, 22%
>   30yr: 0.7 bb vs. average announced issue
>   size of 5.1 bb, 14%
>   
>   Bonds were bought by BBK at every one of
>   these auctions and for each maturity
>   
>   The 2yr auction has failed total bids
>   (announced issue size) 2x in the last 13
>   auctions, the 5yr has failed 2x in the last 15
>   auctions, the 10yr auction has failed 5x in the
>   last 11 auctions (note that the last 2 auctions
>   have failed), and for the 30yr 3x in the last 12
>   auctions.
>   
>   DV
>   


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2009-01-09 EU News Highlights

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Highlights

Trichet Sees ‘Significant’ Economic Worsening, II Magazine Says
European Confidence Drops to Record Low; Unemployment Increases
German Exports Drop 10.6% as Recession Hurts Orders
German Ministry Seeks $136 Billion Fund to Ease Company Credit
German bond sale’s fate signals trouble ahead

‘Bond failures’ are not all that uncommon in the eurozone and more of a debt management issue at this point.

However a rising deficit due to falling revenues and rising transfer payments as GDP weakens could cause the ability to fund to deteriorate rapidly.

Bank failures that require national government funding don’t help either, and the eurozone seems long overdue for multiple major bank failures.

German Builders See 2% Drop in Revenue in 2009, HDB Group Says
Steinmeier Casts Doubt on German Deficit Limit, Rundschau Says
Sarkozy Says France to Provide More Capital to Banks
Spain December Jobless Claims Rise as Economy Enters Recession
European Two-Year Government Notes Decline, Reversing Gains

German bond sale’s fate signals trouble ahead

by David Oakley

A German sovereign bond auction failed on Wednesday as investors shunned one of the most liquid and safe assets in the world in a warning for governments seeking to raise record amounts of debt to stimulate slowing economies.

The fate of the first eurozone bond auction of 2009 signals trouble ahead as governments around the world hope to issue an estimated $3,000bn in debt this year, three times more than in 2008.

The 10-year bonds failed to attract enough bids to reach the €6bn the German government wanted. Bids of €5.24bn, a cover of only 87 per cent, amounted to the second worst auction on record in terms of demand.

Such developments were rare before the credit crisis. Before the seven German bond auctions that failed last year, the last German bond auction to fail was in July 2000 after the dotcom crash.

Analysts said the vast amount of supply is deterring investors and a growing number of countries, including those with deep and mature bond markets, such as Germany, the UK and Italy, are struggling to attract buyers.

The Netherlands has seen bond auctions fail, the UK and Italy have been forced to offer investors higher yields to meet their auction targets, while Spain and Belgium have cancelled offerings because of a lack of demand.

The German finance agency admitted that investor appetite for government debt had waned, although insisted the auction was “not a disappointment”.

Meyrick Chapman, a UBS fixed-income strategist, said when a German bond auction failed it “does suggest there may be trouble ahead for other governments wanting to raise money in the debt markets. Before the financial crisis, German bond auctions just did not fail.”


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German budget squeeze, the noose tightens

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More likely to be higher than expected as the economy deteriorates and credit markets remain problematic.

German Budget Squeezed as Crisis Hurts Revenue, Forces Outlays

By Brian Parkin

German Chancellor Angela Merkel’s government faces revenue shortfalls this year and will have to expand net borrowing in 2009 as the worst economic recession in at least 12 years takes its toll on the budget. Lawmakers meeting in Berlin overnight authorized next year’s net federal borrowing to rise to 18.5 bln euros ($23 bln) from the 10.5 bln euros forecast mid-year, the first increase since Merkel came to office exactly three years ago. The Finance Ministry also said today that the government may raise less money than planned from asset sales this year. “This is very clearly to do with the global financial situation,” Carsten Schneider, budget spokesman for the Social Democrats, coalition partners to Merkel’s Christian Democratic Union, said at a press conference in Berlin. “We are in very difficult economic times.” The government has tried to stem debt growth as the budget expands to pay for emergency programs ranging from tax relief on new low-emission cars to bigger subsidies for energy efficient buildings. Some economists have said that net borrowing may increase further as the recession deepens. “All signs point to a hard economic year for Germany, and this plays out on the budget,” Stefan Bielmeier, an economist with Deutsche Bank AG in Frankfurt, said in a Nov. 19 interview. Even so, Germany “may be getting off relatively lightly if it can keep the deficit that low.”


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Germany- no proactive fiscal response

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This means the deficit will rise via the automatic stabilizers only- falling tax receipts and higher transfer payments, and the economy will get that much worse to get the deficit to where it needs to go to reverse the economic decline.

Given the proactive fiscal responses from the rest of the world, this will likely mean Germany will have to wait for exports to pick up to a world economy that recovers ahead of them.

It also means systemic risk pressures for the eurozone continue to increase:

Berlin rejects spending its way out of recession

“We had an 11 per cent savings rate. Now it’s risen to 13 per cent,” says a chancellery official.

“Given the current uncertainty, you can expect any additional income to go straight into higher savings.” Another argument, mentioned by Peer Steinbrück, finance minister, is that while a fiscal boost could help Germany, Europe’s largest economy is so big it would have to be large enough to be beyond the reach of Berlin’s public coffers. This is why the government has favoured what it calls “leverage” measures: limited subsidies and incentives designed to trigger a disproportionate rise in investments and consumption, such as more generous amortisation rules or a temporary lifting of the car tax.

The package of 15 growth-boosting measures adopted by the cabinet two weeks ago may only be worth €12bn (£10bn, $15bn) over two years but the government expects it to generate €50bn in investments and consumption over the same period.


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German fiscal balance

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The fastest economic growth this decade in 2006, Merkel’s first full year in power, and in 2007 helped her administration to narrow the deficit. The economy expanded 2.9 percent in 2006 and 2.5 percent last year, helping cut cumulative public sector deficit to 37 billion euros and 400 million euros respectively.

Budget surpluses ran last year by Germany’s states and municipalities outweighed a federal deficit to create the country’s first balanced budget since 1969. European Union rules on taming budget deficits apply to the composite budget.

Fiscal policy got a lot tighter than I had realized. No wonder it’s coming down so hard.


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Germany to insure all bank deposits?

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(an email exchange)

Right,

If everyone in Germany tries to take their funds out of the banks they won’t get it, with or without the backing of the German government.

German government insurance can buy them some time, maybe even enough time to make it through if aggregate demand wasn’t falling off so fast.

In the U.S., U.K., Japan and any nation with its own currency and fiscal authority behind the deposit insurance you can get all the funds you want on demand.

> 
>   Finally, the Germans seem to get it. This might be the best news of the
>   weekend. But they need to take the final step. Problem is there
>   is no EU treasury or debt union to back up the single currency.
>   The ECB is not allowed to launch bail-outs by EU law.
> 
>   Each country must save its own skin, yet none has full control of
>   the policy instruments. How do they change this in a hurry?
> 

With great difficulty!

Germany draws up contingency plans for state rescue of banks

By Bertrand Benoit

The German government was last night drawing up a multi-billion euro contingency plan to shore up its banking system, which could see the state guarantee interbank lending in the country and inject capital in its largest banks.

The contingency draft, closely modelled on the British initiative announced this week, marks a dramatic political U-turn for Europe’s largest economy after Angela Merkel, chancellor, and Peer Steinbrück, finance minister, both ruled out a sector-wide state rescue for banks this week.

A senior government official said Ms Merkel and Mr Steinbrück would decide on Sunday which of the measures to implement after consultation with their European partners. Once a political decision was made, he said, the plan could be implemented in the following days.

“We are considering all the options at present to the exception of a massive state acquisition of toxic assets,” the official said. “Whatever we do will be done in close co-operation with our G7 and European partners.”

France announced last night that it was planning an emergency European Union summit tomorrow.

Speaking in Washington ahead of a meeting of Group of Seven finance ministers, Mr Steinbrück said the time had now come for “a systemic solution . . . I am convinced that case-by-case solutions are no longer helping. They are now exhausted.”

The official said Ms Merkel was in daily contact with Nicolas Sarkozy, French president, suggesting that the plan, if approved, could be launched as a joint initiative.

Ulrich Wilhelm, the government spokesman, said: “It is the duty of the federal government to be prepared and to review all options . . . As of now, no political decision has been made.”

Under the draft, Germany could issue a state guarantee for interbank lending worth more than €100bn and provide direct lending to the banking sector. Berlin is also contemplating offering several dozen billion euros of capital to the banks in exchange for equity and may take entire ownership of some institutions.

As an additional option, the government is considering extending the blanket guarantee it issued last Sunday for account deposits to money market funds, which have experienced a steep outflow of savings lately. Fund managers have had to divest considerable quantities of assets to cover the withdrawals.

Bankers said the interbank lending market in Germany had reached near-gridlock.


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Reuters: German surplus

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Wrong time for tight fiscal from a macro perspective, and contributed to the subsequent slowdown, but as a credit sensitive entity they are compelled to go in that direction.

It’s one of those darned if you do and darned if you don’t.

German budget surplus seen at 7 bln eur in H1-report

by Dave Graham

(Reuters) Germany likely posted a budget surplus of some 7.3 billion euros ($10.85 billion) in the first half of 2008 according to the Kiel-based IfW economic research institute, business daily Handelsblatt reported on Sunday.

The IfW thinktank had calculated the combined surplus of federal, state and local governments in the first half equated to 0.6 percent of German gross domestic product, the paper said.

Germany’s Federal Statistics Office is due to publish a budget balance estimate for the January-to-June period on Tuesday. ($1=.6727 Euro)


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