February 25, 2021

Guindos rejects debt forgiveness as “illegal” and “nonsensical”




“The cancellation of the debt would be illegal, according to the treaties,” said Luis de Guindos the obviousness ignored by the PSOE and Podemos, who together with a group of economists have requested that the ECB forgive the debt in the manifesto entitled “Cancel the public debt held by the ECB so that our destiny is once again in our hands. “But I would like to point out that it is not just a legal or treaty compliance issue,” the ECB Vice President continued in his speech at the forum organized by the London School of Economics German Society, “debt cancellation does not make any economic sense or financial at all. ‘ It has also warned that requests like this seriously damage the reputation of states and governments.

Guindos has made a dissemination effort and explained that, by forgiving the debt, the ECB would have a hard time keeping dividends flowing that pays the national Treasury and would see its own balance sheet damaged, so, from an accounting point of view, “debt cancellation may mean a relief in the government’s public debt ratio in the short term, but over time it would affect dividends obtained and there would be an accounting equivalence with an effect perhaps greater than that of cancellation.

For clarification purposes, Guindos has criticized the lack of vision of some governments excessively focused on short-term effects and not on the medium term, pointing out that they run the risk of damaging their credibility and the independence of central banks, as well as the credibility tools such as the debt purchase programs implemented by the ECB. “This debate on debt cancellation I think is damaging, because in the end the governments would not gain much and at the same time the reputation, credibility and independence of central banks would be greatly affected, “he warned.

Around a hundred European economists have adhered to a manifesto headed by the French economist Thomas Piketty, and that in the case of Spain The president of the PSOE, Cristina Narbona, and the head of the Podemos Economy, Nacho Álvarez subscribe. The signatories see the debate on the cancellation of the debts in the hands of the ECB “positive and useful”, in a context in which almost 25% of the European public debt is in the hands of the central bank, which in the Spanish case it is quantified in more than 300,000 million euros. What the manifesto does not explain is who would buy debt from the affected countries in the immediate future after a forgiveness, a question on which the ability of governments to finance themselves depends.

Guindos’s is not, of course, an isolated opinion in this regard. The ECB’s chief economist, Philip Lane, has rejected any cancellation of the national debt. We don’t have that possibility. But even if we did, paying off debt is generally not a good idea. ” The also member of the Council of the ECB, Isabel Schnabel, has even declared through Twitter that “the treaties do not allow it” and that “the debate is harmful and should end.” Even President Christine Lagarde rejected the idea before the full European Parliament for its illegality. The French Minister of Finance, Bruno Le Maire, recalled that “debts are paid, that is the principle of debt.”

Holger Schmieding, chief economist at Berenberg Bank, believes that ‘canceling public debt could be counterproductive, investors could see it as evidence of a broader cut that they would ultimately have to pay for and the result would be financing costs dramatically higher for the states involved. ‘

«They are the governments and not the ECB who have to eat this soup“Says Markus Ferber, EPP spokesman in the European Parliament’s foreign exchange committee,” what they are asking for is de facto government funding from the ECB and experience shows that this is the best route to hyperinflation. “

In terms of the language of the ECB, a cancellation of national debt is a taboo that is not mentioned, because the European issuer is expressly prohibited from public financing and because it would be doomed to bankruptcy. However, all the members of the Council are aware that, given the level of indebtedness, it does not seem possible that some of the European countries will one day pay the debt they have contracted with the ECB. And in the current context of recession, it is inevitable that the impulse measures will not help governments to finance themselves more or less directly.

For this reason, the ECB is debating, not a remission, but possible mechanisms through which be able to help reduce that level of debt. One of the suggestions that has been heard in the corridors of Frankfurt is to turn national debts, or at least part of them, into a kind of perpetual bonds without interest. Liabilities could stick like this for life on the ECB balance sheet and would end up forgotten, but the reputational consequences would be just as serious, so that the debate turns on its own axis and ends up as the question of how long the ECB can continue to give away money to the Member States without losing the confidence of the markets.

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