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Why Debt Has Never Been So Cheap

The explosion of French public debt, a problem? Certainly not for years to come. Despite the historic loans made this year to cope with the Covid-19 pandemic, repayments are falling, year after year.

In 1996, French debt reached the symbolic figure of 60% of gross domestic product (GDP), the so-called maximum authorized by the European stability pact. At the time, the debt service, that is to say the interest payable, was heavy, at 3.4% of GDP.

A quarter of a century and a pandemic later, debt has almost doubled, to around 115% of GDP, but debt service has been cut by two and a half, to 1.4% of GDP. Clearly, the State today has less effort to provide to repay the interest on a gigantic and ever-increasing debt.

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Better yet, interest will continue to fall, despite the huge loans made in 2020. According to calculations by Capital Economics, a research firm, the debt service should fall to 0.7% of GDP in 2022. In other words , this will hardly weigh on the state budget.

Falling interest rates

Behind this paradox is the dizzying drop in interest rates. Today, the French government enjoys this amazing privilege: it can borrow at negative rates. Investors are willing to pay him to give him money. This was still the case on Thursday February 4, when the Treasury issued 6.1 billion euros to be repaid over ten years at a rate of – 0.25%.

This real world upside down is true throughout the euro zone. Germany’s ten-year rates are at -0.4%, Spain’s at + 0.1%, and even those of Italy, despite its serious economic problems, are only + 0.5% .

Suddenly, the consensus is almost complete among economists today: States can get into debt without great risk. “Sovereign debts have never been so secure”, underlines, in a note of January 28, Gabriel Sterne, of the research firm Oxford Economics. Above all, it is better to go into debt to keep the economy afloat during this historic crisis than to let it collapse: “While the debt ratio may seem like a problem, weak growth is a bigger problem”, continues Mr. Sterne.

Indirect action

How to explain this phenomenon of zero or even negative rates, which seems to go against common sense? The European Central Bank (ECB) is on the move. Since the start of the pandemic, the Frankfurt institution has been “Turn the printing press”, to use the old expression. Concretely, it redeems the debts of the States, by creating money ex nihilo, a privilege of the central bank.

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