Some economists advocate for the cancellation of public debt held by the @ecb. This is political madness. The cancellation has no economic rationale and would fuel hawks, while the ECB is actually doing the right thing. My speech to Mme @Lagarde (with English subtitles)
1/16

In a nutshell:
-the cancellation of the debt bears many risks,
-it is contrary to the EU treaties,
-and has no economic benefits!
Let’s review argument by argument 2/16

Argument #1: It bears many risks
Debt cancellation would seriously damage monetary policy, which would lose credibility as it would generate the perception that the ECB is embarking on financing public deficits 3/16

In addition to the “credibility loss” (key for a central bank), the ECB's monetary transmission channels to control future inflation would also be damaged, as assets that could be sold in the future to withdraw liquidity from the system would have been cancelled 4/16

Technical parenthesis (resumes in tweet 7):
ECB BALANCE SHEET
Before:
Assets: Government bonds
Liabilities: capital, bank reserves

After cancellation:
Assets: 0
Liabilities: Reserves; (-) negative capital
5/16

Suppose there is an increase in inflation:

Now:
1) The ECB increases its rates and
2) withdraws reserves / sale of bonds against reserves

After:
The ECB cannot withdraw reserves

The market takes the increase in reserves as permanent 6/16

Argument #1bis: Market risk
The precedent to write off debt could create instability in the markets. If debt held by the ECB is "cancellable", why not the others? Instability is very difficult to foresee and, once created, returning to stability is very difficult. 7/16

If cancellation is badly perceived by private investors, it could increase financing costs for Member States. Hence, instead of taking advantage of the windfall of negative rates, we would be destroying this opportunity. 8/16

Argument #2: The debt cancellation would violate the European treaties
The monetization of public debts (and therefore, even more so, their cancellation) is prohibited by Article 123 of the EU Treaty. 9/16

This prohibition is a key German demand, very concerned about the instability created by Weimar’s hyperinflation. Those who defend debt cancellation are actually the hawks’ best allies: reinforcing the population's fears of the ECB and its emergency bonds purchase programs 10/16

However, the legal argument is weak. If debt cancellation had economic sense, I would be the first one to call for a change in the legal framework. But this is not the case. It seems stronger to point out the lack of economic rationale and the many risks associated 11/16

Argument #3: No tangible economic benefits
Member states are the ECB owners. If we owe debt to ourselves, nothing changes with its cancellation. It is nothing more than a game of accounting deeds 12/16

In terms of flows, interests paid by countries appear as earnings for the ECB and are consequently transferred back as dividends to the respective government budgets. It is a zero-sum game: there is therefore no profit, nor loss. 13/16

Regarding the principal payment, it’s important to keep in mind that governments do not repay their debt, they refinance it! As long as governments can refinance their debt, it is only the associated interest charge that impacts debt sustainability. 14/16

The truth is that the ECB is the key European response tool, the tool that is keeping countries solvent. DO NOT DAMAGE IT or impair its capacity for action, giving weapons to the hawks 15/16

Instead of a damaging & counterproductive debate that will get us nowhere, let's use the political capital available to (1) improve the outdated fiscal rules and (2) implement the recovery plan well. END 16/16