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Financing the public debt in times of crisis
Communication presented by
Philippe Auberger
Member of the General Council of the French Central Bank,
Formerly budget general speaker for the French National Assembly
London School of Economics
October 22nd, 2010
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Financing the public debt in times of crisis
Introduction
The financial crisis of 2008-2009 lead to:
An increase in public deficit and debt
in most developed countries
Financial markets disturbances
increased volatility
risk aversion
The most fragile and indebted countries now find it increasingly difficult
to cover their financial needs
Greater vulnerability – Greece is only one example among others
The absence of a European solidarity mechanism which would ensure
the long term financing of the public debt is severely pointed out.
London School of Economics
October 22nd, 2010
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Financing the public debt in times of crisis
1. Financing the public debt is increasingly difficult
a) Before the crisis, financing the public debt was relatively easy
Maastricht criteria were respected
Deficit < 3 % of the GDP
Public debt < 60 % of the GDP
Public Debt was kept stable
Countries which did not comply with the Maastricht criteria, including those
not part to the European Union, were firmly called to order.
Hence, overruns were neither considerable nor durable.
Developed countries did not face serious difficulties when trying to cover
their financial needs.
Such debts were much sought after by banks as basis for banking
refinancing.
Relative freedom when asked to choose the term
London School of Economics
October 22nd, 2010
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Financing the public debt in times of crisis
1. Financing the public debt is increasingly difficult
b) Since the financial crisis of 2008-2009 started, financing the public debt has
become more difficult
The economic downturn and the measures taken to sustain employment
(automatic stabilizer, new expenses, support to banks) have sharply
increased the deficit.
France : deficit increases from 2.3% of GDP in 2006 to 7.5% in 2009
and 8% in 2010
The brutal increase in the deficit triggers a fast increase in public debt.
France : debt went from 63.8% of GDP in 2007 to 83% in 2010
The annual appeal to financial markets to refinance the debt and cover the
deficit has sharply increased.
France : it went from 120 billion Euros in 2007 to 180 billion in 2010
Even if we would plan on a deficit under 3% in 2013, the decrease of the
debt will be much slower than that of the deficit.
London School of Economics
October 22nd, 2010
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Financing the public debt in times of crisis
1. Financing the public debt is increasingly difficult
c) Difficulties in the financing are greatly concealed by the economic situation
Central Banks’ policies (very low interest rates, use of unconventional
measures) ensure abundant liquidity ready to be invested in “secure” debt.
Thanks to the abundant liquidity, long term interest rates are low:
rate < 3 % for 10-year bonds
When the economic situation will brighten:
•
Private firms will start investing again
•
Central Banks, fearing inflation, will increase their intervention rate
•
Crowding out will occur
•
Greater selectivity in the subscriptions
•
Increase in the cost of debt
•
Inferred effects on the economic situation and on the restrictive budgetary
policy
.
London School of Economics
October 22nd, 2010
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Financing the public debt in times of crisis
1. Financing the public debt is increasingly difficult
d) The difficulties of Greece facing the financing of its deficit during the first
semester of 2010 have illustrated:
The extreme nervousness and volatility in the markets.
lack of conviction in complying with ones commitments
unusual role of the rating agencies
That each country faces its own specific situation which is left to the
discretion of the markets
Example : evolution of the rate spread between France and Germany, it
fluctuated between 20 basis points and 50 basis points
A lack of confidence in the reliability of the mutual aid mechanism within
the euro zone and an important waiting time in the implementation of
policies (European Financial Stability Facility).
London School of Economics
October 22nd, 2010
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Financing the public debt in times of crisis
2. A new governance of public finances appears to be necessary
a) Whether or not it is to be deplored, the rating agencies’ appreciation on the
straightening of the public finances and control of the debt policies cannot be
ignored:
Markets but also Central Banks and in particular the European Central
bank already make good use of such appreciations from rating agencies
Such agencies have announced that they will put under surveillance the
debt of numerous countries, including those with the best marks (AAA)
EU, GB, Germany, France…
The fall in the marks makes the placement of debt more difficult and above
all more costly
Hence the need to adapt the annual and long-term planning to the
expectations of the rating agencies, even if it means drastic budgetary
adjustments and a severe risk of economic slowdown
Should the marking fall, there will be consequences on the financing of the
public sector and of the State Investments
London School of Economics
October 22nd, 2010
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Financing the public debt in times of crisis
2. A new governance of public finances appears to be necessary
b) The preparing of the budgetary decisions and the control of their
execution are made to be discussed with the executive and legislative
powers and, when needed the jurisdictional power.
The terms used differ from those used in accounting with which
firms, markets and rating agencies are more familiar
More readability and transparency are thus required
•
Interlocking of the State, Social Security and Local Authorities accounts
•
Increasing number of changes in the revenues allocation
•
Numerous expenses transfers between the different entities
•
Difficulties when trying to obtain coherent accounts, identifying the
deficits and following their evolution
•
Increasing number of public guarantees, explicit or implicit, which does
not help with the readability.
London School of Economics
October 22nd, 2010
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Financing the public debt in times of crisis
2. A new governance of public finances appears to be necessary
c) Too often budget previsions are based on optimistic economic
previsions, this asks for constant readjustments not to say recurring
revisions
Deficit warnings never are well appreciated by rating agencies and
markets.
The long term planning is most often normative and leaves little
room to unfavorable evolutions of the economic situation
And yet, financial markets need plausible projections that can be
followed continuously throughout the years
A critical review on a fixed period basis, for example quarterly,
using realistic terms is crucial for the plausibility of the reasoning.
London School of Economics
October 22nd, 2010
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Financing the public debt in times of crisis
2. A new governance of public finances appears to be necessary
d) Working at the European level is essential in order to bring on a
balanced judgment on the evolution of public finances and ensure an
effective solidarity
The presentation of the documentation in terms of public finances
of the different States should be standardized to enable
comparisons of revenues, expenses, deficits and covering of the
latter based on reliable information
The idea is not simply to coordinate the budgetary policies and
appeals to markets for the financing of the deficit but to aim for a
real convergence of such policies
The definition of the objectives that have to be reached needs to
be more strict and sanctions must be executed should a State fail
to reach such objectives
London School of Economics
October 22nd, 2010
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Financing the public debt in times of crisis
Conclusion
The idea is not to debate on or criticize the role played by the
financial markets in the financing of de the deficits and of the
public debt.
It is a fact, and nobody, bank or financial intermediary, is able to
take the place of the markets.
Because of the specificity of the public sector, the presentation, the
follow-up, the standards of financing and public offerings, have all
been developed in a very different way compared with what
normally occurs in the private sector.
To achieve a greater readability, transparency and credibility, it is
time to work on the convergence of the methods and accounts
used in the public sector and in the private one.
London School of Economics
October 22nd, 2010
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Financing the public debt in times of crisis
Schedule : a few figures illustrating the evolution of public finances
Public Debt / GDP
2006
2007
2008
2009
Germany
67.6
65.0
66.0
73.2
Greece
97.8
95.7
99.2
115.1
France
63.7
63.8
67.5
77.6
Italy
106.5
103.5
106.1
115.8
GB
43.5
44.7
52.0
68.1
Source Eurostat
London School of Economics
October 22nd, 2010
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Financing the public debt in times of crisis
Schedule : a few figures illustrating the evolution of public finances
Government surplus
2006
2007
2008
2009
Germany
- 1.6
0.2
0.0
- 3.3
Greece
- 3.6
- 5.1
- 7.7
- 13.6
France
- 2.3
- 2.7
- 3.3
- 7.5
Italy
- 3.3
- 1.5
- 2.7
- 5.3
GB
- 2.7
- 2.8
- 4.9
- 11.5
Source Eurostat
London School of Economics
October 22nd, 2010
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Financing the public debt in times of crisis
Schedule : a few figures illustrating the evolution of public finances
Gross debt
(in billion Euros)
2007
2008
1 571
-
-
1 762
Greece
205
-
-
273
France
1 150
-
-
1 489
Italy
1 582
-
-
1 760
GB
861
-
-
1 067
Germany
2006
2009
Source Eurostat
London School of Economics
October 22nd, 2010
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Financing the public debt in times of crisis
Schedule : a few figures illustrating the evolution of public finances
Planned evolution of the
public deficit
(% GDP)
Germany
2009
- 3.1
2010
- 4.5
2011
-
2012
2013
- 1.5
-3
(in 2014)
France
- 7.5
-8
-6
- 4.6
Italy
- 5.3
-5
- 3.9
- 2.7
Greece
- 13.6
-8
- 7.6
- 6.5
-3
-
-3
(in 2014)
Source : monthly newsletter of the ECB 09 - 2010
London School of Economics
October 22nd, 2010
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Financing the public debt in times of crisis
Schedule : a few figures illustrating the evolution of public finances
Planned evolution of the
public debt
(% GDP)
France
2009
78.1
2010
82.9
2011
86.2
Source : economic and financial report – octobre 2010
London School of Economics
October 22nd, 2010
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