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“Like a chestnut tree, the temptation of voluntary default returns regularly”

Debt in Debate (s)

France issued, Tuesday, January 19, government bonds to the tune of 7 billion euros with a maturity of 50 years, subscribed immediately by investors, whose demand was ten times higher despite a very low rate of 0.593% . Agence France Trésor plans to issue 260 billion in medium and long-term debt securities in 2021. The debate on debt, which divides economists between those who consider it “unsustainable” and those who consider it “ sustainable ”given the current borrowing conditions, gradually passes to the question of the use of such sums and the sharing of the burden of their financing – since it is indeed there. Should the financial burden of the State be reduced by budgetary restrictions, or by more fiscal solidarity? Should we “reassure” the markets, or renegotiate debts, or even cancel them? Should we irrigate banks and markets with this financial windfall, or distribute it directly to households and businesses?

Tribune. “Do you want me to do debt?” “, François Fillon replied, in March 2017, to exhausted caregivers who questioned him about their working conditions. The Covid-19 crisis swept away many dogmas that had prevailed since the public debts of developed countries exploded. This phenomenon had started following the two oil shocks of 1973 and 1979. The indebtedness worsened further during the financial crisis of 2008. The shadow of this debt will weigh for a long time on the next generations. It siphons off part of the fiscal resources for the payment of interest. A growing share of new borrowings is allocated to repaying previous ones.

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When debt-to-GDP ratios flirted with the symbolic 100% threshold, it was thought to have crossed a red line. History provides us with some much more significant episodes. At the end of the Napoleonic wars, England’s debt approached 200%. But the return to peace and the industrial revolution confirmed its cyclical, even accidental, aspect. At the moment, we must accept the idea of ​​seeing this ratio settle permanently at stratospheric values. So, like a chestnut tree, the temptation of voluntary default returns regularly, among politicians, but also among economists. We all dream of the newfound freedom to finance the post-Covid-19 world. However, there are constraints that cannot be ignored.

Virtual certainty of bankruptcies

The creditors of the States are not anonymous small savers that one could consider despoiling without consequences. French public debt is 24% held by French institutions. Not repaying is the virtual certainty of bankruptcy of banks, insurance and life insurance companies, pension funds. Not sure we are winning. Have the central bank buy back the debt? This has already been the case since the 2008 crisis. Finally, more than half of the debt is held by non-residents (52%). These institutional investors would not fail to take us to court, with the risk of no longer being able to borrow on the financial markets. A significant portion of our debt is in the accounts of other central banks. Like the Banque de France, each central bank holds currencies to meet the commercial and financial needs of its nationals. These foreign currency assets are invested in the safest securities, government bonds of other countries. But a unilateral decision would immediately lead to reciprocity of default, and international trade would seize up.

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