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Does the ECB hold 25% of France’s debt?

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CheckNews, France

16 May 2019, Updated: 22 May 2019

Does the ECB hold 25% of France’s debt?

The leader of France’s leftist party La France Insoumise declared that the European Central Bank holds a quarter of France’s public debt. In reality the figure concerns the Bank of France, which turns over a part of its profits to the French state.

Your question refers to the appearance of Jean-Luc Mélenchon on the evening news of French TV channel TF1 on 5 May. His declaration was: “Among us French, who knows [this]? 25% of the French debt, that of the French state, was bought by the ECB. And you and I, when we pay our taxes, we are paying a share of the debt to the central bank. It’s a bit technical but it’s a crazy situation”.

According to the leader of La France Insoumise (LFI), the European Central Bank (ECB) holds a quarter of the French public debt. The situation which goes back a few years, resulting from an ECB policy intended to kickstart the European economy. And it helped lower the interest rates paid by the French state.

A quick reminder: in the mid-2010s, as the spectre of deflation hung over Europe, the ECB decided to implement an “unconventional” policy – quantitative easing – which consisted of buying huge quantities of eurozone public debt on the secondary market. In other words the ECB bought bonds not directly from states when issued – which is forbidden by the EU treaties – but rather later on the “secondhand” market, from commercial banks.

This practice, which lasted from March 2015 to December 2018, was tantamount to injecting money into the European economy – between € 80 B and € 15 B per month – in order to stimulate both inflation and the economy.

The program involved, in total, € 417 B of bonds issued by the French state and French public agencies. This represents 18% of France’s public debt of around € 2 300 B, not too far from the figure (25%) cited by Mélenchon.

However, contrary to Mélenchon’s claim, it was not the ECB which bought and holds these bonds, but rather the Bank of France. Along with the ECB, the Bank of France and the other eurozone central banks make up the so-called Eurosystem. The Bank of France holds 20% of the ECB’s capital. And it is on the ledger of the Bank of France that these bonds appear.

So whereas Mélenchon objects to paying the ECB’s interest, in reality this interest is paid by the French state to the Bank of France. Moreover, a (large) share of the Bank of France’s profits are then turned over to the same French state. In this way, in 2018 the Bank of France returned € 5.6 B to the French state, out of its € 7 B of “ordinary earnings”.

This policy helped lower interest rates for the French state (and most of its European peers). In line with the principle of supply and demand, massive purchases of sovereign debt reduced the pressure on interest rates. And therefore reduced significantly the debt costs incurred by France.

“This system allowed debt to be taken on more cheaply, and money to be saved for financing things other than interest payments”, points out Emmanuel Carré, economist at the University of Bretagne-Sud. “For short-term borrowing the rates even became negative, that’s to say that lenders pay the French state to take their loans.”

When contacted by CheckNews, sources close to Jean-Luc Mélenchon acknowledged his imprecision concerning the real holder of the bonds (Bank of France, not ECB) but considered that this was still the Eurosystem. The LFI party wants a European debt conference with the aim of cancelling, or transforming into “perpetual debt” (that is, freezing), the bonds held by the ECB. LFI even seeks to circumscribe the ECB’s independence in order to allow it to buy eurozone sovereign debt directly, at the time of its issue.

To sum up, Mélenchon is not far from the truth when he says that the ECB holds 25% of French public debt, although really it is on the books of the Bank of France. The fact that the ECB holds – via the Bank of France and the policy of quantitative easing – almost 20% of the French state’s debt helped reduce significantly the cost of this debt for French governments. And by the same token reduced the profits going to commercial banks, the only ones able to buy bonds at their issue. Mélenchon and his followers want to go further than this, by cancelling the debt held by the ECB and reducing the bank’s independence so as to allow it to lend directly to states.

Translation by Harry Bowden, VoxEurop

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