Debt issues exploded with the Covid crisis. They were already high before, but now they are reaching record levels that even surpass the subprime crisis of 2008. An article from the Banque de France takes stock of the situation: in the euro zone, net debt issuance has reached 1.116 billion euros since the beginning of the health crisis (from March to August inclusive). Governments have taken the largest share (874 billion euros, 78% of the total), followed by "non-financial corporations", i.e. large companies capable of issuing bonds with 122 billion euros, then banks and insurance companies with 107.5 billion euros, and an "other" category with 12.5 billion euros.

It is the decline in activity due to the lockdowns that is pushing governments to boost their spending and deficits in order to limit the extent of the crisis. France leads the way with a debt explosion equivalent to 13% of its GDP (and a total indebtedness that rose from 100 to 113% of its GDP, and close to 120 at the end of the year). Is this the right solution? Public subsidies rarely create wealth, and often they keep zombie companies alive; tax cuts and tax deferrals would probably have been more useful.

Banks borrowed far less than they did during the 2008 crisis, not because they are in better shape than at the time, as the Banque de France would have us believe, but because the subprime crisis affected them directly, causing massive and immediate losses for many, whereas in 2020 it is the real economy that is severely impacted (by repeated lockdowns). The effect on the banks will come after (defaults on loans), and it will probably be no less severe .

Who bought this mountain of debt? The article answers bluntly: "These issues have mainly been absorbed by the central banks" of the European Union countries, i.e. ultimately the European Central Bank (ECB), which brings together and aggregates these institutions. The 19 national central banks of the euro zone bought 59.2% of public debt issues and 63.1% of private debt issues carried out between March and August 2020, i.e. a total of 756.7 billion euros.

The balance, about 317 billion euros, was bought by EU banks and mutual funds. Not for "economic" reasons (to satisfy a demand for investments from their clients), but to bring them as collateral (guarantee) with the ECB in order to obtain liquidity in exchange. Banks spend money... to get money. Why do they do it? They need to dress up their balance sheets with assets considered "safe" (government debt), because the rest (loans to the economy) are likely to deteriorate as the economic crisis intensifies.

As can be seen, public debt is found in the accounts of the ECB, either directly (by acquisition) or indirectly (as a guarantee of liquidity lent to banks). The snake bites its tail, the public deficit is financed almost entirely by the central bank: the money supply explodes, the spectre of inflation approaches, etc.

If the market (private investors) were to be counted on, such an explosion in demand for financing would push up interest rates, causing this mountain of debt to collapse, dragging governments and banks down. Fortunately, this full financing by the ECB keeps rates at zero. Finally, it is fortunate for the governments, which finance themselves painlessly in this way, but unfortunate for the savers, whose traditional bank investments no longer yield anything, before they are eaten away by inflation.