Editorial - July
The issue of record global debt levels is more pressing than ever. While interest rate pressures could rekindle fears about the sustainability of the interest burden, voices are already being raised to criticise the stimulus plans deemed to be inadequate in Europe in relation to the need to revitalise economies and the emergency requirements that need to be met.
As in 2008, resolution of the crisis is taking the form of ever greater indebtedness. Nearly all the competent authorities have decided that the cure is no worse than the disease.
« Just as "insurance begets initiative", debt makes it possible for a government, company or household to implement a plan over time in order to create the anticipated value. »
Operators certainly have access to debt, but also to leverage. Debt that rolls over time and is passed onto the next generations, citizens, shareholders and our children. There is no issue if the leverage effect is "useful" and if indebtedness enables the investment multiplier to create wealth to be shared out over the long term. A good debt for a good investment which will lead to a fair accumulation of value over time.
Unfortunately, the debt peak over the last two years does not fit this scenario. The deterioration of public and private finances resonates of a lost consumption of goods and services and a falling employment rate during the health crisis. A permanent loss of growth. And when we talk about leverage in this regard, the effect is negative: the increase in public expenditure in France is twice as high as the expected loss of wealth creation for the 2020 – 2023 period. But it is public expenditure which can be financed thanks to the concomitant purchase programmes of the central banks. It should be recalled that the ECB's balance sheet has increased by 50% in just 1 year (and has risen 5-fold since the 2008 crisis…), making it possible to speak of "magic” or “easy” money.
Lastly, controlling debt is also a matter of sovereignty at a time where all the talk is about national recovery. And it is a fact that governments and companies have lost a proportion of their independence and freedom of action as their main creditors are non-residents. However, in light of global competition to attract savings and investment as described in our paper entitled Economic & Financial Outlook, it would appear that the best way to find credit is to deserve it, presupposing full compliance with one's undertakings.
Managing director, Head of Asset Management, Marketing, Trading and Research
July 19, 2021
Covéa Finance, a portfolio management company of the MAAF, MMA and GMF groups with share capital of €24 901 254, incorporated as a single-person simplified joint stock company, registered with the Paris Trade and Companies Register under number 407 625 607 and approved by the French Financial Markets Authority under number GP 97 007.
This document is produced for information only and cannot be considered as an offer to sell or investment advice. It does not constitute the basis for any commitment of any kind, nor a strategy assessment or any recommendation to invest in financial instruments. It contains general and non-personalized opinions and analyzes designed by Covéa Finance on the basis of figures that it considers reliable on the day of their establishment depending on the economic context, but the accuracy and validity of which are however not guaranteed. The views expressed in the document are subject to change without notice. Covéa Finance cannot be held responsible for any decision taken on the basis of information contained in this document. This document is the intellectual property of Covéa Finance. Any Use (defined below), reproduction or distribution of all or part of this document must be subject to the prior authorization of Covéa Finance. The recipient of this document is aware of and accepts that the quantified data, allowing the establishment of general and non-personalized opinions and analyzes, may be subject to the acquisition of rights vis-à-vis third parties. Therefore, the encrypted data may under no circumstances be the subject of any use by the recipient of the document without the prior acquisition of the necessary rights directly from the third party holders of these rights. Furthermore, the recipient of this document is aware and accepts that Covéa Finance will in no way be responsible for any use made of said encrypted data and will alone assume all the consequences vis-à-vis third parties who hold the rights associated with this data. "Use" is understood as, and without limitation, the manipulation of encrypted data, distribution, redistribution, integration into an information system or into documents of all types.