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To whom a government loan is awarded
A government loan can apply for these facilities:
Local authorities: These include the federal government, federal states or municipalities. Government loans can also be granted to other states.
Public special funds: This can include the former Federal Post or the Federal Railways.
Public utility associations: These include companies for water supply, hospitals or emergency services.
Religious communities: In order to receive a public credit, this community must have a public recognition.
Social insurance institutions: For example, the AOK or the company health insurance funds can apply for a government loan.
Professional associations: This group includes, for example, the Chamber of Commerce and Industry.
Public-sector banks: Savings banks or Landesbanken have the opportunity to use government loans.
Public-law insurances: Possible beneficiaries of a government loan would be, for example, the Versicherungskammer Bayern or Sparkassenversicherung.
Broadcasters: Public service broadcasters like the ZDF or the radio stations of the ARD could apply for a state credit.
Sense and purpose
With a state loan, the state has the opportunity, on the one hand, extended to promote public institutions. On the other hand, he can provide capital support to these institutions in the event of financial bottlenecks. Initially conceived as an instrument for economic development, public credit is often an instrument for crisis management in times of economic crisis.
The granting of government credits is severely limited because states themselves must have sufficient cash to remain solvent and reduce public debt.
State loan as a rescue tool
The state also has the ability to help companies with government credit, which are of great public interest or in which the state has a large share.
It became clear to consumers in Germany in 2008 that a public credit can not only be used for public institutions. At that time, the car company Opel asked the state for help.
The company had serious financial problems and was about to go bankrupt. It threatened plant closures and mass layoffs. Ultimately, the state set up a rescue plan together with the parent company GM.
A similar scenario occurred when the drugstore chain Schlecker filed for bankruptcy in 2012. At the time, however, the company did not receive any state credit.
Shapes and types
Basically, two types of state credit are distinguished from each other. Borrowers have the option of receiving a so-called “original” or “indirect” government loan. The determination of interest, maturities and repayment modalities is determined individually for each government loan.
In contrast to traditional loans, the issue of government loans usually has many different aspects to consider. Government loans are earmarked and serve either the promotion or the financial emergency assistance.
The original state credit
The original state loan works similar to a conventional installment loan. First, a public-law institution makes a loan application to the federal government. Subsequently, the creditworthiness of the applicant is checked. If the creditworthiness is confirmed, state and borrower conclude a loan agreement in which all conditions are fixed.
Only from mortgage lenders
Primary government loans may only be lent by mortgage lenders.
In terms of collateral, the original government credit differs significantly from a personal loan. For example, corporations often do not have collateral.
This peculiarity is explained by the fact that, for example, municipalities or municipalities are hardly endangered by insolvency. On the one hand, the state financial equalization system ensures protection and, on the other hand, countries or the federal government can guarantee in the background.
When a sovereign loan is given to companies in exceptional circumstances, securities may serve as collateral. For example, the state can use large shares of a company as collateral for lending.
The indirect state loan
The indirect state loan is used more frequently than the original state credit. To obtain an indirect government loan, the public-sector borrower applies for a loan from a credit institution.
In the case of indirect government credit, this service provider is also referred to as an “intermediary” because it stands between the state and the borrower. The intermediary issues promissory notes on mortgage lenders to the loan.
The mortgage lender has the advantage of having an indirect government loan that it must operate a lower administrative burden. This eliminates the need for credit checks. Likewise, the bank does not have to worry about the eradication.
Instead, mortgage banks can resell promissory notes and benefit from greater flexibility. At the same time significant they have the opportunity to refinance their government loans. For refinancing, the public Pfandbrief is often used.
State loan for the self-employed
A special form of state credit is the entrepreneur loan for self-employed persons of the Kreditanstalt für Wiederaufbau (KfW). This is not really a credit granted directly by the state.
However, since KfW is a state-run banking company, one could speak of a government loan for self-employed persons in the offered business loan. The advantages of this loan are the favorable credit conditions. On the one hand, borrowers benefit from favorable interest rates and long terms with fixed interest rates.
State loan for the home purchase
Similar to the corporate loan for self-employed persons of the KfW is spoken also with promotion possibilities for homeowners of the “state credit”. For home purchase or home construction citizens have various options available to receive state-subsidized loans.
On the one hand, there are KfW loans for the modernization or conversion of residential property, on the other hand, also residential Riester can be regarded as a form of the state credit for the house building or house purchase.
In contrast to the original or indirect state credit, this is not a direct lending by the state, the state is not the lender. Rather, it is banks that grant cheap loans on a government contract.
Government loan as a bond
Often it is also spoken of a state credit, if States procure themselves capital. In this case, the term government credit is used synonymously with a government bond. In a sovereign bond, the state offers investors the opportunity to lend money. In return, the lenders receive a guaranteed rate of return at a fixed term.
Government bonds are often used by governments to refinance their own lending. In 2012, the federal government was the first to raise money via bonds without having to pay interest. In 2016, government bonds took their first negative interest for the first time.