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Germany turns debt into profit

August 1, 2016

States borrowing money from investors normally pay interest on debts they pile up. But amid Brexit concerns, tumbling banks and slow economic growth, it's everything but business as usual as the German example shows.

Euro coins and notes
Image: picture-alliance/dpa/D. Reinhardt

The German state profited from incurring more debt in the first half of this year, a newspaper report showed on Monday.

State bonds issued with negative interest rates flushed around 1.5 billion euros ($1.68 billion) into federal coffers, as total interest spending dropped from 9.7 to seven billion, the "Bild" daily reported.

German government bonds with a maturity of up to 10 years currently carry a negative interest rate, which means investors, who would traditionally expect a return on their investment, actually pay to own them.

In July, Germany first issued a 10-year-bond with sub-zero interest, while it has already made money from securities with a shorter maturity before.

Cautious investors and a large buyer

Amid increasingly volatile financial markets - rocked for instance by Brexit woes and reeling Italian banks - investors increasingly look to park their cash in safe havens.

German state bonds enjoy a top-notch credit rating and have long been considered a rock-solid option - so much so that buyers now purchase them, even if it comes at a price.

Also, the European Central Bank (ECB) has been buying up sovereign debt on a large scale for some time in a program dubbed quantitative easing.

It is supposed to kick-start stalling eurozone economies and push up inflation. But it also drives down state bond interest rates.

mrk/hg (AFP, Reuters)