German Constitutional court rules that the transfer of unused pandemic debt into climate fund is illegal (Second Supplementary Budget Act 2021 is void)

• "The Court’s decision means that the volume of the Climate and Transformation Fund is reduced by EUR 60 billion. Insofar as the state has entered into obligations that it can no longer service as a result of this reduction, the legislator must compensate for this through other means."

via Karlsruhe

Reaction details (09:08)

• A ruling which has sparked some immediate but modest upside in Bunds, lifting from 131.10 to 131.22; the upside was driven by the ruling implying that German issuance would be circa. EUR 60bln less than expected by 2027 with the reaction shortlived as the impact on individual FYs between now and 2027 is somewhat limited.

Analysis details (09:12)

• The ruling concerns circa. EUR 60bln of unused COVID-era funding; opposition parties sued the government's over the use of the funding in 2022 (retroactively for FY21) saying that it allowed the debt brake to be circumvented.


• The unfavourable ruling from the constitutional court now means the gov't needs to find funding for the climate fund elsewhere, a task which could be difficult given Germany's fiscal backdrop and differing views within the ruling coalition on where to source such funds from.


• Specifically, Germany will have to find an alternative funding source to fill the circa. EUR 60bln debt gap that they have already utilised COVID debt for, essentially leading to a borrowing reduction of the same amount between now and FY27.


• Following the announcement, ING adds that the ruling "also opens the door to more special-purpose vehicle financing and creative accounting. It also shows that structurally accommodative fiscal policies in Germany are very unlikely to happen any time soon."

15 Nov 2023 - 09:05- Fixed IncomeImportant- Source: Newswires