Germany is preparing for its largest-ever debt financing operation, aiming to revitalize Europe's biggest economy through massive fiscal spending. According to a Thursday announcement by the German Finance Agency (DFA), the federal government will increase debt issuance by 20% next year to a record €512 billion (approximately $601 billion). This figure significantly surpasses the €425 billion planned for 2025 and exceeds the previous peak of around €500 billion set in 2023.
The unprecedented borrowing spree is a key measure by Chancellor Friedrich Merz’s coalition government to counter economic stagnation. Following sluggish post-pandemic growth, Berlin has pledged a €500 billion infrastructure fund over the next decade while substantially boosting military spending—a long-neglected sector amid shifting European security dynamics.
German bond prices held gains after the announcement. However, the 10-year yield has risen nearly 50 basis points this year, reflecting market adjustments to increased supply and fiscal expansion.
**Funding Strategy and Maturity Structure** The DFA outlined its financing plan: approximately €318 billion will be raised through capital market auctions, with €176 billion via money markets. Additionally, €16–19 billion in green bonds will be issued.
To accommodate record funding needs, Germany is expanding its toolkit. The agency announced its inaugural 20-year bond issuance—responding to market demand—alongside four syndicated bank offerings in 2025. This follows last year’s reintroduction of 7-year bonds, signaling sustained high issuance volumes.
The aggressive fiscal push is driven by Merz’s CDU/CSU bloc and Finance Minister Lars Klingbeil’s SPD. Their centerpiece includes the €500 billion infrastructure fund to overhaul aging public works.
On defense, lawmakers approved a €50 billion military package Wednesday for armored vehicles, missile systems, and satellites—a budgetary realignment reflecting geopolitical tensions.
**Yield Curve and Market Headwinds** The debt surge coincides with a steepening European yield curve, with 30-year German borrowing costs rising 60 basis points against 5-year rates.
Demand for long-dated bonds faces pressure from Dutch pension reforms, traditionally a key buyer segment. The Netherlands recently shortened its debt maturity targets, while Austria signaled flexibility toward shorter tenors.
Despite industrial challenges—including auto and chemical sectors strained by U.S.-China trade tensions—Germany retains fiscal space. With the lowest debt-to-GDP ratio among G7 nations (under 100%), Berlin forecasts economic recovery in 2026 after an estimated 0.2% growth in 2025.
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