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After government measures, investors flee the UK, but not Germany

Investors fled UK assets after the British government announced plans for a big increase in borrowing to finance tax cuts, but Germany has not suffered the same punishment despite having its own vast debt wave.

Germany unveiled a €200 billion package financed by new loans to pay for a cap on natural gas prices and a tax cut on fuel sales to protect businesses and households from the impact of rising energy prices after that Russia has cut off supplies to Europe.

This represents about 5% of Germany’s total gross domestic product (GDP) and equals roughly half of the country’s borrowing needs this year, but government bond yields — an indicator of its borrowing costs — have actually fallen. .

In contrast, the UK’s announcement of a “mini-budget” to finance tax cuts and a cap on energy prices, with borrowing costing less than half the value of Germany, sent British stocks, bond prices and pound go into free fall.

The Bank of England (BoE) had to intervene in the gilt market to tame volatility and push yields lower.

The ten-year UK borrowing costs are now double those of Germany, a testament to how investors view the two countries very differently.

The British government’s decision to cut the tax bracket for the higher-income population “was one of the major liquidation points for the market,” said Annalisa Piazza, fixed income research analyst at MFS Investment Management.

The wealthy are less likely to cut spending due to inflation, so markets question how much the UK’s tax cuts would boost growth, unlike Germany, she said.

Germany is “supporting those parts of the population that can make a difference in terms of spending,” he said.

Long term

On Wednesday, Germany’s debt bureau said it would raise 22.5 billion euros more during the fourth quarter than originally planned for government spending to tackle the energy crisis.

This represents an increase of only 5% on the year.

Less than half will be raised by long-term debt.

So even before Germany’s €200bn package was unveiled, the government’s borrowing figures were far below the £72bn ($79.98bn) the UK plans to raise over the next six months, the which represents an increase of approximately 45% for this financial year, which will also be raised primarily through long-term debt.

Furthermore, Germany, which has a much lower debt-to-GDP ratio than the UK, will raise money in a way that will allow it to meet its “debt brake”, which sets a strict limit on new borrowing, except in exceptional circumstances.

Source: CNN Brasil

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