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What could “repaying the COVID debt” mean?
The French government (unlike the Italian government, for example) is talking about the need to repay the COVID debt. But what does this repayment involve? If the French government were to repay the public debt held by the central bank, the euro money supply would contract, which is extremely unlikely, and would be very dangerous; If the French government were to repay the public debt held by economic agents other than the central bank, there would be an even more drastic situation of excess demand for risk-free bonds, and therefore even more negative real long-term interest rates. We see that the two options for repayment of France's COVID debt are absurd: The first leads to an unacceptable contraction in the money supply; The second leads to an unacceptable fall in real interest rates .
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Natixis
Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.
Patrick Artus
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