BERLIN, Dec 7 (Reuters) - Most Germans do not want their government to loosen its strict borrowing rules to fix a budget mess - but many in a nation that prides itself on thrift are building up their own debts as a cost of living crisis deepens.

Chancellor Olaf Scholz's coalition is reeling from a court ruling last month that has thrown its finances into disarray and forced it to suspend a constitutionally enshrined "debt brake" for the 2023 budget.

Talks this week could decide whether it will also try to pause the limit on net new borrowing next year to plug a 17-billion-euro ($18.3 billion) budget hole, a move that would risk rancour and another legal challenge from opposition parties.

A poll by public broadcaster ZDF found 61% of Germans were opposed to loosening the debt brake, even though the alternative may involve cuts to welfare and subsidy payments that have helped many weather the economic shocks of COVID and inflation.

Debt experts say an increasing number of people in Germany are already facing financial difficulties as a result of the pandemic and price rises that have eaten into incomes.

"We are seeing a clear turning point in over-indebtedness," Patrik-Ludwig Hantzsch, head of economic research at credit agency Creditreform, told Reuters.

The number of indebted individuals has risen for the first time since 2019, by 17,000 to 5.9 million, Hantzsch said, citing a number which he adjusted for a recent change to how such data is measured.

The year 2023 has also seen a 30% spike in "buy now, pay later" schemes and smaller instalment loans, Creditreform said, as some people of limited financial means catch up on a consumption backlog.

At the same time, Creditreform observed an uptick in "soft" indicators of over-indebtedness – which often precede "hard" problems like bankruptcy.

"Before you're faced with private insolvency, there's a period of payment disruption. This is what we call soft over-indebtedness, and has actually picked up again for the first time since (COVID)," Hantzsch said.

Debt advice centres say they have often been unable to keep up with demand.

"We just don't have the advisory capacity to cope with this," said Ines Moers, managing director of Germany's Federal Working Group on Debt Counselling.

"If the electricity price brake is suspended now, then we are worried that the demand will be even greater," Moers said, referring to energy price caps that the government will allow to expire by the end of the year.

Attempting to quell such worries, Scholz told parliament last week that ordinary Germans would be shielded from the budget crisis, reprising an earlier slogan from an English song lyric that "You'll never walk alone".

But many are not convinced.

"As a banker, I have often seen how people get up to their necks in debt and end up in a spiral of debt," said Jens Mertens, who works in sales at a bank.

"The state has a lot of unnecessary expenditure, for example all the cycle paths in Berlin or the billions in Ukraine. That's where savings should be made, not on social spending for the people here."

Finance minister Christian Lindner is among those who favour budget savings rather than a suspension of the debt brake.

"It's enough. We already pay the highest energy prices and taxes, but our so-called chancellor is still running more debt," said another man angrily, speaking to Reuters as he entered a Metro cash and carry in a southern suburb of Berlin.


Memories of how frugality paved the way for postwar reconstruction and how costly it was to re-integrate ex-communist East Germany have shaped a debt-averse political culture.

In German, the word "debt" is the same as the word "guilt".

At the height of the euro zone debt crisis, then-Chancellor Angela Merkel held up the stereotypically prudent "Swabian housewife" as a model for Europe while hard-up nations like Greece bristled at being strong-armed into austerity.

Among Western nations, German households had a relatively low debt rate of around 100% of their disposable income in 2022 - in the neighbouring Netherlands, this ratio was more than double.

And even in times of crisis, Germans have some of the highest savings rates among industrialised nations. On average, households were able to set aside about 11% of their income in the first half of 2023, government data shows.

For Reiner Holznagel, president of the German Taxpayers Association lobbying group and staunch advocate of the debt brake, careful budgeting is part of German mentality: "It's in our DNA that we don't want to leave our children so much debt."

Another poll by the RTL Group showed that only 34% of Germans wanted the government to take on more debt even though 53% felt the budget crisis would hit their own finances.

Barbara Buchhorn, a retired bank clerk from Berlin, lambasted the government over the budget fiasco. "Any private consumer would have long gone bankrupt. They should have built up savings when they could," she told Reuters.

Karl Wagner, who works in the tourism and wine business, said "a state household should work like a private household", with any debt repaid in a timely manner.

"Or it's the next generation who will suffer the consequences if we spend too much out of laziness or convenience," he said.

(Editing by Matthias Williams and Catherine Evans)