Christian Noyer: Public and private debt - imbalances of global savings
Introductory speech by Mr Christian Noyer, Governor of the Bank of France and Chairman of
the Board of Directors of the Bank for International Settlements, at Session 3 "Public and
private debt - imbalances of global savings", Aix-en-Provence Economic Forum,
Aix-en-Provence, 6 July 2012.
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In introduction to this session, I would like to make seven remarks.
My first remark is inspired by the very title of this session. In advanced countries, the
average public debt to GNP ratio is 100%. In emerging countries, the figure is 30%. This is a
very wide gap, and it represents one of the global economy's largest imbalances. And one of
the least mentioned. It also represents a complete reversal of the situation compared with
just over twenty years ago. At that time, I remember well, I was chairman of the Paris Club,
and emerging countries came to ask for the rescheduling of their debt.
Second remark, global demand is still fairly concentrated on the advanced countries. Not
only is their debt higher, but their savings (as a ratio of GNP) are lower. The G7 countries
alone still account for 56% of global consumption. The problem is clear. How can we hope to
raise our level of consumption if we need to reduce our level of debt and increase our
savings? And if the advanced countries' consumption stops growing, what will happen to
global economic growth and particularly that of emerging countries with entirely
export-oriented economies?
Which brings me to my third remark: we need the emerging countries to continue investing
their savings in advanced countries. We therefore need properly functioning international
financial markets. In a world where the savings and financing needs are so geographically
dislocated, properly functioning financial markets are a prerequisite for economic growth.
But, today the capital markets appear very unsettled and full of anomalies, and not just in
Europe.
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For example, certain sovereigns (the USA and UK for example) borrow today at
historically very low nominal interest rates and at negative real interest rates despite
the fact that their deficits are around 10% of GNP and that doubts exist regarding
the future evolution of their debt levels.
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Another anomaly: large corporations have accumulated unprecedented cash
reserves (several trillions of dollars) despite numerous highly profitable and
unexploited investment opportunities around the world, unsatisfied infrastructure
needs and investment bottlenecks in commodities production.
Fourth remark. We can identify two reasons for this situation:
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The first is the general and exceptional uncertainty weighing on the global economy.
Uncertainty makes liquid and safe assets more attractive. It makes investment less
attractive. It can therefore partly explain the phenomena that I have mentioned.
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The second reason is more structural: a malfunctioning of our financial
intermediation mechanisms. There are doubts about the solidity of banks in
numerous countries. Debt markets are profoundly disrupted and international
movements of capital have been highly volatile over the last two years.
Fifth remark. The intervention capacities of central banks are of course limited. They can
remedy temporary market disruptions and situations of illiquidity caused by uncertainty.
Recently they have intervened to an unprecedented extent, as reflected in their balance
sheets. But they cannot permanently substitute financial markets and banks when financial
intermediation malfunctions. Likewise, low or zero interest rates can contribute to stabilising
the economy in periods of crisis, but if maintained over a protracted period, they can create
distortions, encourage the formation of bubbles and create risk for long-term investors.
Indeed, on this topic, I would like to make one observation. The question of monetary
financing of deficits was raised by David Thesmar. Such financing cannot in any way resolve
the problem of the dislocation between savings and investment, either at the national level or
at the global level. Some central banks have developed large-scale public debt acquisition
programmes. They have done so for reasons relating to immediate macroeconomic
stabilisation... to go beyond the zero-interest rate limit. The Eurosystem as well intervened on
a much smaller scale when malfunctioning debt markets prevented the effective transmission
of monetary policy impulses. There is not a single central bank that is seriously considering
the monetisation of deficits with the more or less declared intention of reducing the weight of
debt via inflation. In my view, this notion is nothing more than a financial analyst's fantasy. In
fact, over the last six months, we have seen constant confirmation of the anti-inflationary
stance of monetary policy with, for example, the FED actually establishing a quantitative
definition of price stability for the first time (in fact, identical to the one used by the
Eurosystem).
Sixth remark. Our immediate priority is therefore to construct or reconstruct the mechanisms
and structures of a sound and efficient financial intermediation framework. That is why, at the
euro area level, the financial union project is fundamental. At the global level, the FSB's role
is crucial in developing a robust technical, regulatory and prudential architecture, adapted to
the interconnection of our economies.
Seventh and last remark: fiscal policy and debt management. Here, I would say that we are
all guilty of a certain degree of ambiguity, both at the market level and at the political level:
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on the one hand we want public debt markets that are broad, deep and liquid,
because they form the base on which our entire financial system is built. In
particular, government bonds are the safest and the most liquid assets. They act as
reserves of value for a large number of investors, starting with the central banks
themselves which hold them as foreign currency reserves or as monetary policy
collateral.
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And on the other hand we want solvent States, i.e. with perfectly controlled deficits
and levels of public debt, which logically places limits on the growth of public debt
markets.
This contradiction is known by economists as the "Triffin dilemma". It was first identified in
relation to the U.S. balance of payments deficits and the value of the dollar, but it can also be
applied to fiscal equilibrium. The economy needs a growing volume of risk-free assets, but
the more they are issued, the more risky they become.
We cannot totally side-step this dilemma, but we can avoid making it worse. It is clearly not
good for major developed countries to find themselves in a situation where their solvency is
put into question, or to allow markets to think that under certain circumstances, they may be
unable to honour all their commitments. But this is what we have done in Europe, against the
better judgement of the ECB, by introducing the principle of private sector involvement. The
idea is attractive in theory. However, its consequences for financial stability are extremely
negative. There has never been any doubt about whether the United Kingdom or the United
States would honour their debts. Today they are enjoying very favourable interest rates
compared with Spain and Italy even though the latters' fiscal fundamentals are better. I know
that some attribute this difference in borrowing conditions to the actions of the UK and
U.S. central banks. I do not agree. I believe that Europe has a major project ahead of it to
recreate a broad, deep and liquid public debt market that is completely and unambiguously
free from insolvency risk.