May 17 2020 •
The weight of France’s public debt will jump, with the crisis of great confinement. But the ECB’s massive buybacks ofEtat loansare a game changer, writes Sébastien Laye, Research Fellow at the Thomas More Institute, in his column for the magazine Capital.
It is understood that carrying a large public debt over the long term is undoubtedly a major weakness that obstructs a country’s long-term growth potential. Unable to reduce its public operating expenditure (60% of a public expenditure itself at a historic level of 56% of GDP) – while sacrificing at the height of the totality of investment – the French State had exceeded in 2019 a debt of more than 100% of GDP: due to the unprecedented decline in GDP this year and increased expenditure due to the crisis, this ratio is expected to soar to 115-120% of GDP at the end of the year. These thresholds are not new while Japan lives very well with a debt of more than 200% of GDP for decades and Italy less well with 130%: it will be noted that the first State is completely sovereign with its sovereign currency and its own central bank (and therefore cannot technically default, with in addition a debt mostly held by its own central bank and domestic agents). There is no need to revisit Italy’s situation in the European construction.
It should be noted that our debt is expressed in the form of a ratio, which no longer means much with the expected large changes in GDP (current collapse and then rebound, one day or another): at 2415 billion at the beginning of 2019, it will swell while our GDP collapses. But it would be enough to regain our GDP at the beginning of the year to, for example, post a rate of 108%, or grow by two percent a few years to quickly recover below 100%, even assuming that we are unable to improve deficits (i.e. to reduce public spending): a combination of correct growth and lower operating expenditure of the State would be enough to control the issue of debt.
On theother hand, a State is not an economic agent likeany other: when its accounts are unbalanced, it is not possible as a household to simply reduce its consumption in order to quickly balance its accounts. The decrease in its expenditure is also the decline in the incomes of other economic agents, and therefore of its revenues. The main focus is therefore on a high level of growth and on the sustainability of debt, i.e. the burden of interest. At this level, there is little concern since low rates and the absence of inflation are rather there to last for the next five years.
Finally, our debt has changed in nature since the quantitative easing policies launched in Europe by the ECB in 2015 and which continue: while technically public debt is still issued on the bond markets and central banks cannot buy these securities directly on issue, they have multiplied the purchases of existing debt to the point that today the Bank of France, on behalf of the ECB, holds 30% of the French public debt. After the Covidcrisis, it will be close to 40%. However, when a central bank holds these debt securities on its balance sheet, assuming that it will never put them back on the market, there is a monetization of the debt: the debt is replaced by money, by monetary creation. It is no longer really a debt that will be due, we are close to the effect of a debt cancellation. It can thus be said that the « debt » that is traded on the markets of the French State, is rather around 80% of GDP.
Of course, it is never a good sign of not being able to reduce its debt-to-GDP ratio, but it is not the cataclysm that some are promising us.