Since the start of the pandemic, states have borrowed to sustain their economies, but what will be the consequences?

..- To face the brutal economic recession, as a consequence of the confinement measures due to the coronavirus pandemic, the States spend without looking: partial unemployment, bailouts of companies in danger of bankruptcy and even reactivation plans. There is only one solution to finance these colossal budget overruns: debt, a traditional tool against recession.

The countries of the euro area or the United States have found financing in the markets under very favorable conditions, thanks to active policies by their central banks, which guarantee very low rates, reassuring investors.

It’s a problem?

Opinions diverge. The OECD estimates that the debt ratio of its 38 members – developed countries – would exceed 101% in 2011, during the financial crisis.

His general secretary, Ángel Gurría, is concerned: « We are trying to take off when we already have a lot of debts and we are going to add more, » he warned during a debate organized by the Financial Times.

Natixis banking, on the other hand, considers this debate “useless”. « There is no problem of public indebtedness, » he noted in a note, stressing that states « can finance it in the long term at very low rates. »

« The question is to use this money wisely, » Radu Vranceanu, professor of economics, told ..

In his opinion, states should not borrow to « save dying companies » or finance partial unemployment to groups that do not need it.

Are countries equal to debt?

Not at all. Argentina has just fallen into ‘default’ with a debt ratio of 90% of GDP, well below that of France, Italy or Japan (record, with 240% in 2019).

“It is a matter of trust. Upon maturity of a debt, a State must find investors to renew it. If they do not trust their government or the future of the country, the state can fall into ‘default’ even with only 30% debt, ”explains Vranceanu.

In the euro area, the ratio of public debt to GDP in the region would go from 86% in 2019 to almost 103% in 2020.

Far from the 60% limit, suspended by the pandemic. The European Central Bank warned on Tuesday that the debt explosion could « rekindle concerns » about some countries. Markets may ignore bonds issued by countries considered fragile.

Is the solution perpetual debt?

In particular, Spain proposed to finance the European reactivation a plan that requires the payment of interest, but not the reimbursement of the total amount.

Many are opposed to this solution. In fact, perpetual debt already exists, according to Vranceanu, since there are countries that refinance it at maturity paying only interest.

Investors provide perpetual loans, but with very high interest.

How to reduce debt?

There are two options: play with the debt stock or with growth.

Germany, for example, opted for rigor in recent years by containing public spending. France, on the other hand, is betting on the recovery of activity, given that the debt ratio decreases if GDP increases.

What if the debt is canceled?

Until now it has only been practiced with the poorest countries. In the early 2000s, it was applied to African countries, but could also be done with developed ones.

Several economists propose this measure, that is, to cancel the public debt in the hands of the ECB. Opponents warn that « this would impoverish the collective patrimony » since the ECB would lose an amount equivalent to its tonnage (assets and money).

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