Exclusive: Germany eyes massive windfall from plunging borrowing costs

By Michael Nienaber and Christian Kraemer

BERLIN (Reuters) - Germany could enjoy a windfall of 5 billion euros or more this year as record-low bond yields slash its borrowing costs, three people familiar with Berlin's budget planning told Reuters on Thursday.

The savings might help Chancellor Angela Merkel's conservatives and Finance Minister Olaf Scholz's Social Democrats clinch a costly climate protection package as tough negotiations come to a head at a crunch meeting next week.

At same time, the cheaper borrowing eases pressure, mounting as the economy slows, to abandon Berlin's balanced-budget policy of not taking on new debt for additional spending.

The Finance Ministry has earmarked 17.6 billion euros (15.67 billion pounds) in its 2019 budget for debt servicing.

But the European Central Bank's loose monetary policy and worldwide demand for safe-haven bonds mean Berlin now expects to pay 10 billion to 13 billion euros, an official familiar with the budget planning told Reuters on condition of anonymity.

Two other budget experts said annual borrowing costs could come in at 12 billion to 13 billion euros this year.

German borrowing costs were just 4.9 billion euros in January to June, a Finance Ministry document showed. Berlin actually accumulated a profit of 1.5 billion euros in March, May and June as yields fell below zero.

FISCAL ACTION

A spokeswoman for the finance ministry declined to comment on the estimated figures, saying the ministry would not participate in any speculation. No conclusions could be drawn for the second half of the year from borrowing costs in the first half, she said.

The ECB on Thursday promised an indefinite supply of fresh asset purchases and cut interest rates deeper into negative territory as it tries to prop up the ailing euro zone economy. ECB President Mario Draghi also called on Germany to counter the risk of a recession with more fiscal action.

In a newspaper interview, Scholz insisted that Berlin was already pursuing an expansionary fiscal policy.

"The federal budget foresees record investments of almost 40 billion euros, and we are making use of the leeway created by lower interest expenses," he told Passauer Neue Presse.

Scholz promised to maintain a high level of public investments despite Germany's deteriorating growth outlook, adding Berlin was mulling an investment programme worth at least 400 billion euros over the next decade, probably even more.

The Finance Ministry document showed that German borrowing costs have plunged since Draghi's famous "whatever it takes" speech in 2012, which calmed financial markets and was followed by an unprecedented ECB programme of bond purchases.

Berlin's borrowing costs dropped from 40.2 billion euros in 2008 to 30.5 billion euros in 2012 and finally to 18.2 billion euros last year, the document showed.

"THANK DRAGHI"

Budget lawmaker Sven-Christian Kindler from the opposition Greens said that since the financial crisis in 2008, Germany had saved more than 160 billion euros through the ECB's low interest rate policy.

Former conservative Finance Minister Wolfgang Schaeuble and his centre-left successor Olaf Scholz should thank Draghi for this gift, Kindler said, adding that the widespread criticism of the ECB among German conservatives was hypocritical.

"The truth is: Sticking to the black zero policy of balanced budgets and at the same time demanding higher interest rates, that does not fit together economically," Kindler said.

Draghi has called for years for governments to do more to stimulate growth.

Kindler said Merkel and Scholz should ditch their balanced budget policy and boost public investment through new debt. "Only if governments across Europe invest more, the ECB can change its monetary policy," Kindler added.

Otto Fricke, chief budget lawmaker from the business-friendly opposition Free Democratic Party, said borrowing costs were likely to come in lower than expected this year.

He cautioned, however, that the windfall could be partly eroded by weaker-than-expected tax revenues as the German economy is on the brink of recession.

(Reporting by Michael Nienaber, Editing by Paul Carrel and Catherine Evans)