Soaring eurozone public debt rekindles call for cancellation
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Eurozone government borrowing has exploded to fund their response to the coronavirus pandemic, reigniting long-standing calls for the European Central Bank to ease the debt burden by forgiving the sovereign bonds it owns.
The proposal was launched by academic economists in response to the last single currency zone debt crisis in 2012. bonds, which are never repaid.
Governments’ responses to the pandemic will rack up € 1.5 billion in additional debt, pushing euro area sovereign debt above the size of the bloc economy this year for the first time. Many countries are running budget deficits above 10 percent of gross domestic product, including Italy, France and Spain. Italy’s public debt is expected to rise from 135% of GDP last year to almost 160% in 2021.
While EU fiscal rules – requiring governments to keep deficits below 3% of GDP and overall debt below 60% of GDP – have been suspended since the start of the pandemic, they are likely to ” be reactivated in one form or another once the crisis is over, put pressure on governments to get out of debt.
David Sassoli, Italian President of the European Parliament, told La Repubblica last month that debt cancellation was “an interesting working hypothesis, to be reconciled with the cardinal principle of debt sustainability”.
Riccardo Fraccaro, a senior aide to Italian Prime Minister Guiseppe Conte, went on to tell Bloomberg that “monetary policy must support expansionary fiscal policies of member states in every way possible.” This could include “the cancellation of sovereign bonds purchased during the pandemic or the perpetual extension of their maturity,” he said.
So far, investors have not added to the clamor – the cost of new debt remains low as the ECB buys most of the additional bonds sold, so many countries are able to borrow up to 10 years at returns near or below zero. It should continue; At its last policy meeting on Thursday, the ECB is expected to extend its bond purchases until mid-2022.
“There are so many reasons not to worry about rising debt levels right now, but in the future we will have to have this discussion at some point,” said Carsten Brzeski, economist at ING. “Some sort of debt cancellation may be necessary, whether done directly by the ECB or by swapping the debt for perpetual bonds with zero interest rates.”
But central bankers dismissed the idea as “dangerous” and “destabilizing” while economists dismiss it as counterproductive and poorly programmed.
“We have to distinguish the political position from the economic position,” said Lucrezia Reichlin, professor of economics at London Business School. “From a purely economic standpoint, debt relief might make sense in certain circumstances, but it depends on how you do it. From a political point of view, it is extremely dangerous. So it seems extremely unproductive to increase it now.
Holger Schmieding, chief economist at Berenberg, said it was “the worst idea of the year” because it “could backfire” by scaring investors off, causing borrowing costs to rise.
In any case, canceling public debt would almost certainly violate the EU treaty ban on monetary financing of governments, as ECB President Christine Lagarde clearly asked about the idea during a discussion in the European Parliament last month.
His colleague, member of the ECB Governing Council and Governor of the Banque de France, François Villeroy de Galhau, said: “Considering debt cancellation would be a very dangerous path. “
Fabio Panetta, the former vice-governor of the Italian central bank who joined the ECB board in January, said: “If we cancel a debt, we cancel the corresponding credit and that could have more consequences. wide and unsettling. Only growth can protect us from debt.
There is also a technical problem with the idea. While central banks can in theory absorb losses and tolerate negative capital thanks to their ability to print more money, the situation in the euro area is more complicated.
National central banks buy most of their government bonds on behalf of the ECB. If the bonds were written off or canceled, the national central banks would bear the losses, without being able to print the money themselves. Their governments might then need to recapitalize them or risk excluding them from the bloc’s payment system.
Another problem is that governments already recoup most of the interest they pay on bonds held by the ECB – via dividends from their national central banks – so they wouldn’t save a lot of money on the cancellation of short-term debt; the only advantage is not having to pay off the debt.
But as long as the ECB continues to reinvest the proceeds from maturing bonds in its portfolio, governments can simply roll over that debt.
“Where’s the gain? Said Volker Wieland, professor at the Institute for Monetary and Financial Stability in Frankfurt. “Only at some point in the future when the ECB stops reinvesting money from maturing bonds, and that’s a long way into the future.”
For this reason, he said that supporters of debt cancellation “are really shooting themselves in the foot.”
The idea has also met opposition within the Italian government. On Friday, Vincenzo Amendola, Italian Minister for European Affairs, told Bloomberg that the country “is honoring its debts”, adding: “We are working with the current treaties, and with the current treaties, it is not possible”.