German finance ministry links high borrowing costs to security overhaul

BERLIN, Aug 19 (Reuters) - The rise in Germany's borrowing costs to a 15-year high reflects the increased security challenges facing the country following Russia's invasion of Ukraine and the need to spend much more on defence, the Finance Ministry said on Wednesday.

German 10- and 30-year borrowing costs hit a fresh 15-year high in Wednesday's session. Bond yields of other major Western economies including the U.S. and Japan have also climbed to multi-decade highs this week due to ballooning government debt and geopolitics, increasing borrowing costs for companies and households and complicating policy.

"In light of Russia's aggression... the security situation in Germany has changed profoundly. Massive investment in security and defence is therefore required," a spokesperson for the ministry said in an emailed statement to Reuters.

From 2027 to 2030 Germany plans to borrow a total of €838.2 billion, thanks to a special fund for infrastructure approved last year ​and an easing of borrowing rules to allow greater defence spending.

Berlin has stepped up spending on defence and security as authorities warn of growing cyber and hybrid threats from countries, including Russia and Iran.

Earlier this month, a suspected attack was avoided when an explosives-laden drone was discovered at Leipzig/Halle airport in eastern Germany, while unidentified surveillance drones have regularly been spotted above military bases and other sites.

"In the long term, it would be far more expensive not to invest today," the spokesperson said.

Analysts expect continued upward pressure on German — and other European — borrowing costs due to the increased defence spending.

As a result of the higher debt levels, Germany's interest payments are set to almost double by 2030, from €41.9 billion in 2027 to €80.7 billion.

Moves in government bond markets reverberate across economies because sovereign debt serves as a benchmark for corporate borrowing and loans such as mortgages. Higher borrowing costs also tighten financial conditions, potentially slowing economic growth that has helped propel stock markets to record highs.

Investors are now particularly focused on the conflict between the U.S. and Iran, which has driven up global energy costs and threatens to boost inflationary pressures and debt.

(Reporting by Andreas Rinke, writing by Linda Pasquini; editing by Gareth Jones)