Should we cancel Covid debt?

Audio 4:32

By: Dominique Baillard Follow

During the coronavirus crisis, all states borrowed heavily to support their economies at all costs. The price to pay is an astronomical debt which we do not yet really know who will repay it and how.

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According to the IMF, all countries have on average exceeded the ratio of 100% of debt to GDP. In the West it is much more: in developed countries the public debt peaks at 120% of the GDP. A peak that had not been reached since the Second World War. The coronavirus crisis has silenced supporters of budgetary orthodoxy. Public spending and its corollary, borrowing, appeared to be the only viable instruments for supporting households, businesses and public services, totally laminated by containment. Now that the bulk of the health crisis has passed, questions about managing this huge debt are beginning to emerge. Or rather, the proposals: outright debt cancellation has become the mantra of some economists and part of the political class, on the right as on the left.

Is this an option seriously considered?

It is a solution that is supported by biblical history and tradition. In the Old Testament, this practice returns every 50 years to reset the counters to zero. In real and recent history, this has already been successfully experienced. By Germany in 1953, its external creditors gave up half of what was due to them. The poorest countries have benefited from 1996 as part of the program overseen by the IMF without this leading to any crisis. There is therefore a know-how, and methods to imagine for the current situation.

Christine Lagarde, President of the ECB, has ruled out total debt cancellation for European states

Like most of the great money keepers, Christine Lagarde is in her role of guardian of the currency. It is true that a total cancellation operation would have destabilizing effects on the Member States of the euro zone. Who then wants to lend to non-repaying states? It would be taking the risk of driving up interest rates, that is, the cost of money. Because if the debt is astronomical, its service is still modest in the West. Low interest rates lighten the service and conscience of public finance officials. And then if the big financiers have played the firemen of world finances almost without interruption since 2008 it is by massively buying back the debt of the States. To cancel this debt is to demonetize part of their action. They are now the main holders of sovereign debt, a form of all-risk insurance against financial crises, which protects heavily indebted states. For them the cancellation is far from being an imperative emergency.

So if debt cancellation isn't on the agenda, who's going to pay the bill?

Most governments will say there will be no tax hikes to reassure their constituents and also to boost the return of confidence, the essential ingredient of the recovery. Without answering the angry question. The governments prefer to imagine accounting tricks to hide this debt which one could not see without shuddering. In France, for example, the government proposes to isolate part of this debt in an ad hoc structure. It remains to be seen how to repay it. The tax levied to fill the safety gap which was to expire in 2033 could be extended until 2042.

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