Olivier de Berranger

How to walk through walls

In Le Passe-Muraille, a famous short story by Marcel Aymé, a man discovers that he is able to walk through walls. This strikes a chord at present since we are all, as investors and taxpayers, asking ourselves how to break through the wall of debt in our path.

The ballooning of public debt is now inevitable: by the end of 2020 it will stand at a record level, confining the Maastricht criteria to the dustbin of history as eurozone debt levels exceed 100% of GDP. For the moment, “repaying” through strong economic growth, renewed inflation or even defaulting or restructuring is off the table.

As such, increasing the money supply (i.e. central banks buying up government bonds) has become the preferred option. Now that the European Central Bank (ECB) holds 20% of French and Italian government bonds and over 30% of German government bonds, there has even been talk of the monetary institution writing these debts off entirely. In our view, a process of “perpetualisation” is a more likely outcome. In such a scenario, borrower countries would repay their debts to the ECB by issuing more bonds, which the ECB would buy up again. This would be similar to the Japanese solution.

Another wall – less clearly defined at present but growing ever thicker – is that of private-sector debt. Non-financial French companies’ debt will swell to over 75% of GDP, or nearly EUR 2 trillion, by the end of the year. The success of France’s government-backed loan scheme in extending credit to almost 500,000 companies has only added to a debt burden that was substantial to begin with.

This phenomenon is widespread throughout Europe, but all the more evident in countries where there is a chronic capital shortfall in the private sector. The Banque de France has indicated that non-financial companies’ capital equates to 74% of GDP[1], which is roughly the European average. The equivalent figure for the United States is 125% of GDP, meaning that “corporate America” has considerably greater firepower. This stands to reason because the less capital a company owns, the more it needs to borrow to restart, reinvest or absorb an economic shock of the same order of magnitude as the current health crisis.

The ending of Marcel Aymé’s short story is hardly encouraging. The man who can walk through walls, a civil servant and aspiring burglar, loses his powers and gets stuck in a wall forever, where he is set in stone for eternity. Let’s hope that individuals’ recent forays into the stock market[2], industry-specific initiatives[3] and the European recovery plan erase the capital shortfall within companies and stimulate investment. After all, that’s the only way to truly walk through walls.

[1] F. Villeroy de Galhau, speech to the lower house of the French parliament, 22/01/2018
[2] Between the end of February and the start of April 2020, the AMF reports that there were 150,000 new investors in the French market
[3] The French insurance federation (Fédération Française de l’Assurance) has developed a EUR 1.5 billion investment programme