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
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