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Is Germany Building a Cash War Chest?

Government Liquidity Reserves Increased Heavily During COVID19

General governments (central, state and local governments) hold a substantial part of their cash reserves with central banks. The German central government is holding its cash reserves almost exclusively with Deutsche Bundesbank. Normally, we would not care much about cash deposits, as governments can raise cash easily on debt capital markets. Also in normal times, government deposits tend to be comparatively low. This, however, seems to change, when times are not normal.

During COVID-19, for instance, governments initially raised too much cash, which was then only partly spent with the remaining part parked at central banks as shown in the below chart. Government deposits with Deutsche Bundesbank peaked at €279bn in September 2020. It then declined to €151bn in February 2021 only to rise again to €261bn in December 2021. After that, it fell again to €163bn in February 2022.

What Will Happen to Liqudity Reserves After the Invasion of Ukraine?

Government cash deposits are highly seasonal as the blue and orange lines below clearly show. Inflows typically peak mid-month with strong outflows at the beginning of the (next) month. So, large swings are normal and they even seem to have increased during COVID19 as the blue line below oscillates strongly around the orange average line.

German Government With Largest Liquidity Increase in Almost Two Years

Just as the impact of COVID19 on the economy seemed to be waning, Russian strongman Putin started his war with Ukraine. The latter begs the question if governments have already started to build or increase liquidity reserves again.

Obviously, it is still too early to tell, but the German general government increased its central bank deposits by €42.6bn (23.4%, Δ 1 week) to a total of €224bn last week. There might be many reasons for this and it was mid-month with usually strong inflows as mentioned above. But it was also the largest increase in 91 weeks in €-terms, so unusually high even for a strong week. Whether this is related to Ukraine remains unclear for now, but we will continue to monitor the trend in the following weeks.

And you can do too by looking at our weekly updates including Eurozone data HERE.