ECB’s Villeroy Insists on Necessity of Repaying Additional Debt

3 October 2020

By David Barwick – FRANKFURT (EconoStream) – European Central Bank Governing Council member François Villeroy de Galhau on Saturday insisted on the necessity of repaying the public debt incurred as a consequence of the crisis.

In an interview with French public radio channel France Inter, Villeroy, who heads the Bank of France, pointed to Italy as an example of what happens when there is less investor confidence in a country’s willingness and ability to repay its debt.

Although ‘there is no numerical limit to the debt’, he said, ‘on the other hand there is a totally key element, which is the trust of those who lend to us.’

This trust is based on confidence about French ability and willingness to repay the debt, he said. ‘So, first of all, we must be absolutely clear that this debt will not be cancelled. If there started to be any doubt about France's willingness to repay the debt, then we would immediately see the lenders leave.’

Villeroy reminded that in joining the euro, France ‘said very clearly that we would never do’ what would amount to monetary financing. Respect for this prohibition ‘is a commitment that we have made’, he said.

‘But beyond that, if there were the slightest doubt about our willingness to repay, then confidence would diminish and what would happen?’, he asked. ‘If investors had less confidence in France, first they would start by raising the interest rate, the price at which they lend us.’

This isn’t just a principle in theory, he said, noting that Italy pays more to finance its debt ‘because there are a few more questions about Italian debt.’

He continued: ‘And then there's the ultimate stage, which is that if at some point confidence is really lost, then you can't borrow at all. That was Greece ten years ago, it is Argentina today. Fortunately, France is not there yet...’

French capacity to repay the country’s debt implies not attempting to do so immediately, but rather when growth returns, he said, observing that pre-pandemic output levels were anticipated to be restored in 2022. But also important is self-control when it comes to spending, he said. In this respect, he added, ‘we are not there.’

‘We can't afford everything all the time’, he elaborated. ‘There is a justified debt which is the Covid debt. There is a debt that is dangerous, it is the one where we would live beyond our means for a long time. Here we must be careful.’