BERLIN (MNI) – German federal net new borrowing this year will
likely be markedly below the E48.4 billion earmarked in the 2011 budget
bill, the Bundesbank said in its Monthly Report released Monday.

The central bank pointed to the pick-up in tax revenues and a lower
interest rate burden as reasons for its optimism.

Federal tax revenue rose 11.0% on the year in January, but the
result was distorted to the upside due to lower contributions to the EU
than a year earlier, the Finance Ministry said earlier on Monday. For
the full year, the government’s tax estimate commission forecast in
November a tax revenue drop of 0.2%.

Total tax revenue excluding local taxes in January was 5.5% higher
on the year, the ministry said. Full-year government forecasts project
an increase of 1.0%.

The Bundesbank predicted in its report that a decline in the public
deficit towards 2% of GDP “seems possible” this year. Last year, the
deficit amounted to 3.5% of GDP. The EU Stability and Growth Pact sets a
deficit limit of 3% of GDP.

“A continued positive economic development should support the
decrease of the deficit,” the central bank argued, noting that the
unwinding of economic stimulus programs would contribute.

The Bundesbank urged the government to make use of favorable
conditions to cut deficits faster than planned. It reminded that the
government has called on fellow Eurozone countries to adopt debt
limitation rules similar to those of Germany.

“A consistent implementation of the national rules [in Germany] is
therefore ever more important,” the central bank insisted.

The Bundesbank again called on fiscally troubled Eurozone member
states to cut their deficits swiftly and undertake extensive structural
reforms. “Fiscal aid from other countries can at best buy time to extend
the adjustment process,” it cautioned.

The European Financial Stability Facility (EFSF) has from the
current viewpoint sufficient instruments to support the troubled member
states, the Bundesbank reckoned.

The central bank criticized proposals that the EFSF should buy
bonds of fiscally ailing Eurozone member states on secondary markets.

“In the end, private creditors and national fiscal policies would
be even more freed from their responsibilities, while taxpayers from
financing countries would have to shoulder further, possibly
significant, risks,” the Bundesbank reasoned.

It also lambasted ideas that the EFSF should give money to troubled
states so that they can buy back their own bonds, arguing that this
would amount to a disguised intergovernmental transfer.

The central bank made the same points regarding the future
permanent European Stability Mechanism, also rejecting proposals that it
should be able to buy government bonds of ailing Eurozone states or give
them money to buy back their bonds.

These proposals “are reducing the incentives for solid fiscal
policy and are impairing important fundamental principles of monetary
union, such as responsibility for fiscal policy on the national level
and a mutual liability exclusion,” the Bundesbank warned.

In that context, the Bundesbank once again rejected the idea of
joint issuance of eurobonds by Eurozone member states.

–Berlin bureau: +49-30-22 62 05 80; twidder@marketnews.com

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