Public debt: towards a new crisis?

This new crisis arose following the explosion of rich countries’ level of indebtedness. Greece and Ireland are on the verge of bankruptcy while Japan, the United States, Italy, England and Belgium are reporting record high levels of government debt.

It is the entire economic system that is suffering.

Public debt: a long history

Loan issues are nothing new in fact. That practice saw the light of day during the Middle Age. Loans were then contracted on behalf of the monarch. But the notion of public debt, as such, was eventually cleared in the 17^th century, along with the concept of the modern State.

The first institutional debt in history appeared in the early 13^th century in Italy. It was the Grand Council of Venice in 1262 that launched a mandatory public loan to finance its wars against Genoa and the Byzantine Empire. Gradually other Italian cities will follow in the footsteps of Venice, and create financial institutions to manage public debt , hence an official debt market.

Loans are contracted on behalf of the city itself, not on behalf of its leaders.

Subsequently, public debt will be generalized to all European monarchies. In France the first public loan was initiated by King François 1^st in 1535. In the 18^th century, Great Britain, which then was affirmed as a great European power, put in place a modern and efficient debt system which allowed it to borrow without delay and at low interest rates.

The most indebted countries ¹

In the 19^th century, the dominant financial powers at that time provided full repayment of their loans. During the 20^th century, public debt has reached record high levels because of two world wars. The strong post-war economic growth led to the rapid wipe-out of the debt.

In the United States, congress established in 1917 a limit to public loan, and this ceiling has continued to be raised ever since. It has been increased ten times in the last ten years from 6 400 billion USD in 2002 to 14 280 billion USD in July 2010 and to 14 300 billion USD in August 2011, almost 100% of GDP.

Definition of public debt

Public debt is the set of financial commitments made by the State in the form of loans. It corresponds to the funds spent by the governments to pay their deficits.

Public deficit occurs when government revenues are lower than the costs (budgetary expenditure) of the government.

Whenever a public deficit is financed by loan (State or Treasury bonds) debt increases. It is, therefore, the accumulation over a long period of annual deficits.

Public debts are widely held by foreign stakeholders: pension funds, banks, sovereign funds, insurance companies, ...

The ability to repay contracted loans is estimated by the major rating agencies: Standard & Poor's, Moody's and Fitch ratings.

The causes behind indebtedness

• the slow growth, punctuated by recessions
• the funding of more and more important expenses (unemployment, health, security, ...)
• the declining government revenues due to tax cuts and exonerations granted to companies
• the Basel accords that have whetted the appetite of banks for more government bonds by decreeing them virtually without risk
• the recovery plans on public funding. They were started by rich countries to emerge from recession. In 2009, Germany’s public debt jumped from 64.9% to 78.8% of GDP and that of France rose from 63.9% to 83.5% between 2007 and 2010
• the failure of some European banking systems and their almost complete nationalization between 2008 and 2009
• the indifference of governments towards budget deficits

The consequences of indebtedness

The increase in the indebtedness level of the rich countries has a systemic and devastating impact on the world economy. In addition to being a burden on future generations who will have to repay it, debt is mostly a brake on growth.

The least indebted countries ¹