Germany agrees deal to underwrite debt of states

Tue, Jun 26, 2012, 01:00

CHANCELLOR ANGELA Merkel’s government agreed to underwrite the debt of Germany’s states, backing a form of burden-sharing that she is resisting at the euro-area level to combat the financial crisis.

The federal government, facing pressure from the 16 states over tighter European Union budget rules, dropped its opposition to a form of shared debt sales to help the states escape a deficit squeeze and meet constitutional limits. The two layers of government plan their first joint debt sale in 2013, the government press office said in an e-mailed statement yesterday.

Dr Merkel’s coalition backed down in a deal the opposition, which controls the upper house of parliament, said will help secure ratification of the EU’s fiscal pact in Germany.

With EU leaders due to discuss further integration at a summit on June 28th-29th, the accord in Germany doesn’t mean the bloc’s dominant economy is ready to assume liability for the entire euro zone, finance minister Wolfgang Schäuble said.

Joint debt sales in the 17-nation currency region “don’t make sense” as long as budgets are set by national governments, Mr Schäuble told ZDF television.

“As long as the national states make the decisions, they have to be liable. If you can spend money on my tab, you won’t be thrifty.”

German bonds rose yesterday, outperforming their euro-area peers, as investors sought safety before this week’s EU summit, the 19th aimed at crisis resolution. Bavaria, one of Germany’s richest states and home to the world’s two-biggest makers of luxury cars, BMW and Audi, has argued against shared debt sales in Germany, saying that so-called Deutschland bonds would weaken budget discipline.

Merkel’s spokesman, Steffen Seibert, said in March that she opposed the measure.

Germany’s federal and state governments will be separately liable under the plan, finance ministry spokesman Martin Kotthaus told reporters in Berlin yesterday. The aim of combined bond sales is to boost the sale volume, increase market acceptance through the federal government’s participation and reduce costs, he said.

“Bigger volume normally means better conditions,” he said. Details of the plan haven’t been set yet, Mr Kotthaus said.

Besides Deutschland bonds, concessions by Dr Merkel’s coalition include €580 million in one-time federal aid to local governments and a commitment of €75 million annually for day care, plus an unspecified amount of federal help to states to care for the elderly, said Kurt Beck, the premier of Rhineland-Palatinate state.