A debt, in principle, is repaid. But since the French Revolution, examples of debt cancellation abound. And the health crisis could provide new ones.
If you are lucky enough to have gone for a drink with your friends before the curfew, perhaps you participated in the now-classic debate: “Should we focus on health or the economy ?” And in this counter debate, perhaps you have mentioned, looking serious, the 117% of debt that France should accumulate by the end of the year. One of the guests undoubtedly raised his chin and said, through the smoke of his cigarette: “In any case, we will have to cancel the debt” , convinced that he has just put all the Nobel Prize winners out of work. ‘economy.
That’s right, why don’t we cancel the debt? Although the Covid-19 has – it seems – brought us into the next world, let us be aware that this proposal is far from new and that our ancestors have already experienced debt cancellations, at their own risk and perils. Not knowing where we are collectively going because of this same crisis, it makes sense to take a look at our past. Perhaps there are some useful lessons in history for dealing with our current crisis.
A royal technique
Without claiming to be exhaustive, let us not resist a detour through medieval times. Because until Louis XIV and the regency, almost anything was allowed to escape his creditors. Philip IV, said Bel , King of France from 1285 to 1314, and has built a reputation for “counterfeiter”, for reducing the number of metals in the coins in order to produce new ones, and pay his debts with devalued coins. The technique, which combines inflation and devaluation, has the advantage of deflating the debt artificially.
But above all, Philippe Le Bel attacks the Order of the Temple, was born in the XIII th century and quickly became the Bank of the West. Accusing them of being “heretics, idolaters and sodomites” , Philippe Le Bel had the Templars arrested. Several are sent to the stake as a form of intimidation. Does the debt still exist if no one is there to claim it?
Fortunately, not all bad payers roasted their creditors, and these brutal procedures subsequently became scarce. But all debt crises raise the same question: can we renounce past commitments without consequences?
Let us return to an episode which will mark the management of receivables for several decades. In May 1789, Louis XVI opened the Estates-General to deal with popular unrest, but also to appease the economic slump that France was going through. The elected officials decide on this occasion to nationalize the goods of the Church and to sell to the public assignats, that is to say, Treasury bills, pledged on these goods, and which the State undertakes to reimburse. A quick way to finance the budget. The December 19th, 1789, France issues assignats for a considerable amount of 400 million pounds. Unfortunately, these titles depreciate quickly, to the point where they soon lose interest in their holders. In 1795, 18 billion assignats circulated on the territory, at a derisory value. Just come to power, the Directory undertakes not to issue any more assignats and passes a law which cancels, with a stroke of the pen, two-thirds of the debt.
The two-thirds bankruptcy will be the last default on France’s public debt to date. ” It was an emergency measure among others, in the face of a crisis, and, in the short term, its benefits were mixed, write Gérard Béaur and Laure Quennouëlle-Corre in The crises of the public debt: XVIII e -XXI e century (2019). It proved to pay off in the long run, however, as it enabled the relatively easy mobilization of finances for subsequent wars. ”
Nevertheless, the following rulers will use it as a scarecrow and as the ultimate example of bad management of public debts, of which they will be wary.
One hundred years of bickering with Russian loans
But a hundred years later, the small French carriers will experience a new catastrophe, this time not linked to the bankruptcy of their government, but to that of a foreign state. In the aftermath of the October 1917 revolution, the Bolsheviks who had come to power inherited the debt contracted by the tsarist regime. This one borrowed during several decades significant sums from France or from Great Britain, to finance its railroads and its industry.
“At the time, everyone wanted a Russian loan and it is not uncommon to find it in the attics today.”
Laure Quennouëlle-Corre, research director at CNRS
After the revolution, the Russian press was quick to recall that debt can be cancelled, and that the sums lent by France in 1905 allowed Nicolas II to crush the revolution. In short, nothing disposes the Soviets to repay the debt owed to France. In the same book, a Bolshevik by the name of Larine justifies this measure as follows: “As for the part of our loans which, especially in France, is placed in the hands of small owners, the French capitalists will only have to open their stock market and take over the reimbursement of smallholders. It will be for the French capitalists a punishment perfectly deserved for their war and, if they try to avoid it,
To Larine’s great misfortune, this provoked crisis will not sow the seeds of the proletarian revolution in France. Small French creditors are still turning to the state, and for good reason. This one had actively encouraged the French to subscribe: approximately 1.6 million of them would thus have bought these titles. “At the time, everyone wanted a Russian loan and it is not uncommon to find one today in the attics,” comments Laure Quennouëlle-Corre, research director at the CNRS.
This affair poisoned Franco-Russian relations for more than a century, regularly recalled in the memory of French rulers and put back on the table for bilateral negotiations. It was not until 2019 that the Court of Cassation showered the hopes of French creditors and speculators. Following an appeal by the International Federative Association of Russian Loan Holders (Afiper), which has counted up to 400,000 members ready to assert their rights, the Court indicates that it cannot compel Russia reimbursement, since it is a sovereign state.
In 1795 and again in 1917, France and Russia unilaterally cancelled their debt: they therefore defaulted. There are, however, cases where these debt cancellations have been granted or even encouraged by the creditors.
Germany’s much-reduced debt
Germany has defaulted three times , under the indulgent gaze of its creditors. First episode: in 1931, Germany bends under the price of reparations from the First World War. Bankruptcy is in sight and a year later creditors grant Germany a substantial discount. It only remains for him to pay a symbolic sum of 3 billion reichsmarks.
This debt reduction in favor of Germany will not have, it is known, made it possible to appease the feeling of revenge of Germany, at the dawn of the Second World War. In 1953, the Western States re-enlisted and signed the London Agreements with Germany, so as not to overburden Germany with new reparations. This agreement provides that Germany will pay most of its debts only if it should one day be reunified under a peace treaty.
Germany, when the time comes, will make sure that the 1990 reunification treaty does not bear the mention of a “peace treaty”. And thus escape its war debts, the third remission in barely a century.
Following the example of the Bolsheviks who denied the legitimacy of the debt inherited from the tsar, many countries of the South will, from the 1990s, benefit from reductions. They are indeed encumbered with an “odious debt”, of which the international institutions (the IMF and the World Bank, which have supervised the restructuring of debt for several years) will admit the reality. This is defined as “a debt without benefit for the population, contracted by dictatorships with the complicity of creditors” , according to Renaud Vivien, member of the Committee for the Abolition of Third World Debt (CADTM). In 1996 the “heavily indebted poor countries” (HIPC) initiative was put in place. In 2005, the Multilateral Debt Relief Initiative (MDRI) completely cancelled the multilateral debt, that is to say that held by the World Bank or the IMF.
But debt cancellation does not always mean, as Germany did, economic take-off. Argentina is an emblematic case of this paradox. At the end of the 1990s, 90% of Argentina’s debt was denominated in foreign currencies, mainly in dollars. Between 1998 and 2001, seven austerity plans succeeded one another at the request of the IMF. In 2005, 76% of bondholders ended up agreeing to be repaid at a very low rate, $ 0.32 for every dollar loaned.
“Every country in the world is going into debt at exactly the same time and for exactly the same reason.”
Hubert Kempf, professor of economics
This country has therefore pulled off the cancellation of its debt , “but it emerges from this crisis with a lot of resentment and no longer wants the IMF to take care of its debt, nor to borrow on the financial markets,” explains economist Laure Quennouëlle -Corre. This episode will mark Argentina’s relations with the United States, where some of its creditors live. Above all, Argentina loses credibility as a borrower.
In 2020, the country is still entangled in its debt: last August and after long months of negotiations, Argentina had to carry out a new restructuring on 66 billion dollars of its debt. Proof that debt cancellation does not relieve all ills.
While many economists agree that defaults are expected to increase due to the health crisis, it is difficult to say whether cancellations will become commonplace. “We are facing an unprecedented situation, where all the countries of the world are going into debt at exactly the same time and for exactly the same reason” , cautiously emphasizes Hubert Kempf, professor of economics at ENS Paris-Saclay. The debt of poor countries and that of Argentina were quickly rescheduled this year.
But that of France, as huge as it is, benefits from borrowing rates that evolve below 0% . France should therefore finance itself this year entirely at negative rates. It can, therefore “consider that the debt does not represent an emergency” , as Bruno Tinel, a lecturer at the Panthéon-Sorbonne University, maintains.
It may also consider that it is better to take advantage of the current period to renegotiate to its advantage, rather than wait and risk that its creditors will not be less lenient in the future.