LIVE MARKETS-Markets price in German debt-to-GDP ratio at 68%

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MARKETS PRICE IN GERMAN DEBT-TO-GDP RATIO AT 68%

German Chancellor-in-waiting Friedrich Merz reached a deal with the Greens on a massive increase in state borrowing.

As these measures aim to boost economic growth and military spending, analysts are now evaluating their potential impact on German debt.

"The 5 bps of relative cheapening in 10-year Bund swap spreads versus other European government bonds since the election equates to an implied increase in debt/GDP of about 6 percentage points", which would take the debt-to-GDP ratio to 68% for Germany, Citi analysts said in a research note issued before today's announcement.

If Germany builds up to spending by about 130 billion euro a year, based on the headlines of 500 billion in infrastructure over 10 years and 400 billion in defence over 5 years, "a quick calculation suggests it would need to keep that up for 2-3 years to increase debt/GDP by the same (6%)," they add.

The bottom line is that "the market is perhaps not overreacting to the headline, but the longer-term risk is that the spending falls short."

(Stefano Rebaudo)

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