In 2020, public debt jumped from 95% to 119% of GDP. However, the interest to be paid on this mountain of money will fall by 2.5 billion thanks to low interest rates and the ECB’s purchases
Hibernate. Put the economy in a freezer to take it out when the pandemic has passed. The main measures of the Government to face the consequences of the covid in the field of the economy have had this objective as a mantra. The motor to power this freezer has a name: public debt.
We can already make a first balance. 2020 has been a year of records in this section and a electric power plant in Frankfurt (now that there is so much talk about the light) it has been working at full capacity to supply the power to the freezer.
ECB Assisted Breathing
The European Central Bank (ECB) has multiplied its purchases of Spanish debt. Total, 137,000 million of Spanish debt in the last twelve months. They are 2.3 times more than in 2019. The ECB’s portfolio has accumulated 469,000 million, a maximum since the central bank began its debt purchase program to help overcome the crisis (first the financial crisis of 2008 and then that of the pandemic).
To get an idea of what this injection from the ECB means: last year the Public Treasury (the body that sells the debt) issued 110,000 million new bonds and bills to deal with the covid crisis. The ECB has acquired Spanish debt above that figure.
Public debt at highs
This increase in the mountain of public debt has caused a quite remarkable jump. Our country owed 95% of its GDP in 2019 (a figure that was already considered high at that time and that it wanted to reduce even more). Debt is usually measured in proportion to the size of an economy to get a better idea of its weight and to be able to compare it with other countries.
In 2020 it is estimated that it closed at 119% of GDP (the figure is provisional). This year it will not drop much: up to 117%. In Europe, the red line is assumed to be at 60% of GDP (although this benchmark may change in the future).
Also keep in mind that This rebound is due both to higher debt and the fall in GDP. At the end of the day we are talking about a division: debt / GDP. (If the economy sinks, as it did in 2020, even if the debt had not increased, the result of the division would be higher).
Another way of looking at debt
There are economists who believe that, given the current context of low interest rates, the matter should be looked at differently: How much is the interest paid? After all, what governments do is refinance the mortgage while they are paying the interest. That is to say: it is rare that they return all the money because they usually find someone who, as a payment is due, lends them that amount. Investors, funds, central banks are regular customers.
This interest burden represented 2.4% of GDP in 2020 and 5.6% of income (low values compared to 2014, for example). Nothing to see is that 119% of GDP that accounts for all debt. “For prudence and rigor, you have to look at all the metrics, both in good times and in bad times.”Said Rafael Doménech, head of Economic Analysis at BBVA Research, last week. “In order to guarantee low interests at the national level, it is necessary to generate confidence among investors and for the economy to grow.”
Saving low rates
It is true that an environment like the current one allows us to save a lot of money. (We even issue debt with negative rates). In 2020 having a lot more debt than the previous year, we spend less on paying interest: almost 2.5 billion in savings.
At the worst moment of the financial crisis, Spain allocated more than 35,000 million just to pay the interest on the debt it had generated. In 2020 that figure was 25.9 billion (and with a much higher mountain of borrowed money).
Magic? Own merit? Rather, the effect of the ECB’s engine: its purchase program (called PEPP) helps reduce interest rates on debt. The average rate that Spain pays for all its mortgage It is at a minimum: 1.86%. We came from figures above 5% …
The other debt: private
Equal or more important than the public debt (which all Spaniards owe), is the private debt: that of households and companies. In this section, quite sharp falls have been observed in recent years (this phenomenon of reducing debts is called ‘deleveraging’). In 2020 we see it rebound in both cases: we know that companies have turned to credit to deal with the covid. (And here the factor of division also enters: they are compared with a lower GDP and that also makes the result rise).
For some economists the possible seed of the next crisis is cooked precisely here: in household debt specifically. Despite the rally, it remains relatively low. But something similar to public debt happens: there is no magic number that guarantees us to be out of danger. We are much better off than in the financial crisis of 2008. Safe then?
“Markets are supposed to be efficient and private debt is what it has to be. However, with a official price of money at 0% it is possible that the debt will grow beyond what is reasonable, both publicly and privately”, Explains Jorge Bielsa, professor of economics at the University of Zaragoza. There is that risk of overheating overheating the economy. “It is as if the thermostat is stuck at zero but the heating continues to work: the heat can rise very high and suffocate us.”