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7. Indebtedness. Interest Payment and Public Debt
- Leuven University Press
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Indebtedness 215 Indebtedness interest Payment and Public debt Natacha Gilson and Jean Deboutte1 executive summary Belgium’s public debt steadily fell from 1993 to 2007. Unfortunately, the financial crisis erupted and led to an increase in the debt-to-GDP ratio from 2008. Nowadays, both academic literature and public debt managers pay attention not only to the public debt level but also to its composition. Actually, a large strand of literature has been devoted to the public debt structure. Nevertheless, as these theoretical models cannot easily be implemented, modern Debt Agencies are mainly based on operational goals aiming at minimising the financing cost of the debt within the framework of appropriate risk management. Moreover, recent trends in the type of public debt instruments issued by several OECD countries, namely the issue of very long-term bonds or of inflation -linked bonds, showed that the need of some investors may also influence the public debt structure. Belgium indeed participated in this trend with the issue of very long-term nominal bonds. Finally, from the point of view of the interest rates paid on the debt instruments which make up Belgium’s public debt, it is important to bear in mind that the launch of the euro was a very significant event which took place just before the period under review in this book. Public debt ownership, the implicit interest rate and the spread against the German benchmark were markedly influenced by this major change. 1. Natacha Gilson is Professor at the Catholic University of Louvain. Jean Deboutte is Director at the Belgian Debt Agency. 7. 216 The Return of the Deficit introduction This chapter, entitled “Interest payment and public debt”, aims to describe the changes in Belgium’s public debt and in its associated interest rates over the 2000-2010 decade. Therefore, this chapter starts with a description of the evolution of Belgium’s public debt over the period under review. Next, as the importance of the public debt composition is nowadays widely acknowledged, Belgium’s public debt structure will be presented just after a sketched explanation of the differentiation between the theoretical economic development on the optimal public debt structure and the principles guiding the Belgian Debt Agency. Actually, a large strand of literature has been devoted to the public debt structure. Nevertheless, these theoretical models cannot easily be implemented, a fact which explains that current practices in modern Debt Agencies are mainly based on operational goals, aimed at minimising the financing cost of the debt within the framework of appropriate risk management. Moreover, recent trends in the type of public debt instruments issued by several OECD countries, namely the issue of very long-term bonds or of inflation-linked bonds, showed that the need of some investors may also influence the public debt structure. During the 2000s, several countries issued very long term bonds (30 years or more) or inflation-linked bonds. These trends are related to the needs of some investors and the Belgian position in this matter will be explained. Finally, from the point of view of the interest rates paid on the debt instruments which make up Belgium’s public debt, it is important to bear in mind that the launch of the euro was a very significant event which took place just before the period under review in this book. The evolutions of Belgium’s public debt ownership, of its implicit interest rate and of its spread against the German benchmark will be set out below. The facts presented will show that they were indubitably influenced by this major change. [3.239.119.159] Project MUSE (2024-03-28 09:44 GMT) Indebtedness 217 1. evolution Ten years ago, a book on public finance in Belgium over the 19902000 decade appeared. The chapter on public debt started with these words2 : “Belgian public debt, with its huge volume, is the Achilles’ heel of Belgian public finance”. Ten years later, this assertion can still be considered as true despite the huge efforts made to decrease Belgium’s debt-to-GDP ratio. Indeed, above any constraint at the European level, the high public debt-to-GDP ratio in Belgium needed to be reduced in order not only to reduce Belgium’s exposure to economic shocks, such as an increase in the interest rate, but also to gain some room for manoeuvre in the event of a slump in economic activity. The picture below testifies to efforts aiming to reduce the public debtto -GDP ratio in Belgium. It shows...