Home > Finance > What is a Debt Brake? And How Does It Work?

What is a Debt Brake? And How Does It Work?

61 Views
image001 5cc0b63e

The debt brake is an obligation anchored in the Basic Law, according to which the state is to be encouraged to run a balanced budget. The problem in the past was that government tasks and investment projects were often financed by debt. This has resulted in a significant mountain of debt. In the long run, this can lead to economic instability. With the debt brake, new borrowing is only allowed to a very limited extent. Before you borrow with brake, we urge you to click here and go through portfolio recovery lawsuit.

We’ll shows you how the debt brake works, what consequences it has and that the debt brake has now also found its way into other member states.

How exactly does the debt brake work?

The federal and state budgets are basically to be balanced without income from loans. The federal government and the states can provide for rules to consider the effects of an economic development. These effects deviate from the normal situation symmetrically during the upswing and downturn, as well as an exception rule for natural disasters or extraordinary emergency situations. Sometimes, emergency situations are beyond the control of the state and significantly impair the state's financial position. For the exception, a corresponding repayment rule is to be provided the income from loans does not exceed 0.35 percent in relation to the nominal gross domestic product.

The aim of the debt brake is to reduce the debt ratio. The debt ratio reflects the relationship between the national debt and the annual economic output (measured by gross domestic product – also abbreviated to GDP) of a country.

Example: In 2019, the debt level in some of the US states was around 2053 billion dollars. This contrasted with a total economic output of around 3436 billion dollars. The debt ratio was around 59.8 percent.

The debt brake is intended to encourage the state to exercise budgetary discipline by preventing it from taking out loans that exceed 0.35 percent of GDP. Usually a state finances itself to a not inconsiderable part by taking out loans. These loans are called government bonds because the state borrows them. Old government bonds are paid for with the help of new government bonds. From a financial point of view, this approach is harmless as long as the debt ratio is below approx. 90 percent. According to the specifications of the European Stability and Economic Pact, an even stricter debt ratio of a maximum of 60 percent is required.

In the past, the American debt mountain grew gradually as the decision-makers pursued debt-financed investments rather than a balanced budget.

In exceptional economic emergency situations, the 0.35 percent rule on new debt may be deviated from.

Restriction denied by the bank

The resting position is a halfway house between account seizure and withdrawal of the seizure. It means that the bank allows the debtor to dispose of his account again, but at the same time the account remains attached in favor of the oblige in the event of the worst. With the suspension, the creditor usually pursued the goal of persuading the debtor to pay, because he thus enabled him to dispose of the account and at the same time retained the attachment of the account as a means of security for a possible renewed default.

We will explain to you what an idle position is exactly, whether the bank can refuse a dormant position and what the consequences for the parties if the dormant position is rejected.

What is a rest position?

A suspension is an agreement between the bank and the creditor to the effect that an account attachment against a debtor is to be suspended. The whole thing was preceded by a prior attachment of the account as part of a foreclosure. For this purpose, the creditor has obtained an enforcement order against the debtor based on an outstanding monetary claim, for example by means of a dunning procedure. With the execution order as the title, the oblige has the execution court to issue an attachment and transfer orderrequested. By delivering the transfer order to the bank, the debtor's account is seized. This is called entanglement in technical jargon. From then on, the debtor is required not to make any account access (i.e., in particular cash withdrawals, transfers or standing orders). And the bank, also called third-party debtor from then on, is fundamentally obliged not to allow any disposals in favor of the debtor, because any account assets are intended to serve the creditor to satisfy his titled claim. With the delivery of the transfer order, the bank is asked to declare whether it recognizes the creditor's claim.

If creditors and debtors agree on a form of debt repayment after the attachment of the account, the question arises as to what should happen with the attachment. The debtor will regularly offer the oblige the prospect of repaying their claim – e.g., in the form of an installment payment agreement – ifthe latter withdraws the attachment of the account. As a rule, the creditor will partially agree to this proposal, if otherwise there is no timely opportunity to have his claim settled.

However, if the attachment is withdrawn, the account will end up being entangled. This means that the debtor can use his account again. This is fine for the creditor as long as the debtor pays. However, this is not certain. Therefore, in the past there was an “intermediate thing” between attachment of an account and withdrawal of the attachment: the suspension. The purpose of the suspension is to give the creditor protection against interim attachment. Because after the seizure is withdrawn, it can happen that another creditor also seizes the debtor's account. If the payment is not made, the creditor is faced with the problem that a new garnishment has to "come up behind". Because the interim attachment now has first priority. Only when the interim attachment has been settled can the creditor count on transfers from the bank again. In order to escape this unfortunate situation, the creditor declares the bank to be in suspension, so that the attachment should not be carried out for the time being, but should nevertheless remain. This has the advantage of being able to dispose of the debtor and the advantage of the oblige.

The big problem, however, is that the banks are increasingly turning their backs and refusing to stand still. This has led to a creditor wanting to oblige the bank to do so by court ruling. How the Federal Court of Justice decided on this action regarding the suspension, you will find out in the following section.

No rest position and the consequences for the parties

Due to the decision of the Federal Court of Justice, the suspension as a tried and tested means of balancing the interests of the creditor and the debtor has died. This inevitably moves the behavior of the creditor into the center of consideration. If the debtor links the repayment of a debt to the condition that the oblige agrees to a seizure redemption, the latter can no longer point to the bank and state that it has refused the suspension.

In practice, this means that an agreement between the creditor and the debtor that provides for a debt repayment after the attachment of the account only if the attachment is withdrawn can hold the creditor particularly accountable. If he wants to comply with this agreement by instructing the bank to suspend and the bank denies this, then the only solution can be a “complete withdrawal” of the attachment. Otherwise the oblige can behave in bad faith (§ 242 BGB). It is not yet clear whether he could even lose his seizure right as a result.

TAGS
Business Module Hub