Medical science will eventually bring the Covid-19 pandemic under control by producing enough vaccines to inoculate everyone. In the meantime, the virus has caused an economic shock of global proportions, worse than the financial crisis of 2008. With the rapid evolution of various strains the experts predict a new wave of infections that may be worse than the previous one. That requires a bold economic response.
President Macron to his credit endorsed the case for helping poorer countries cope with the pandemic. This would take the form of a new issue of Special Drawing Rights (SDRs), an instrument administered by the International Monetary Fund (IMF). The IMF distributes the SDRs among its members in accordance with their shareholdings. The bulk of the shares is held by rich countries, which don’t really need them because they can borrow money in their own name from the financial markets. They can however lend their allocations to poorer countries of their choice who are desperate to receive them. That is how a new issue of SDRs helps the less developed world to cope with the pandemic.
Because the US is the IMF’s largest shareholder, it has a veto over issuing new SDRs. The Trump regime exercised this veto on spurious grounds, but US Treasury Secretary Janet Yellen has made it clear that the Biden administration will lift the veto and allow the governing board of the IMF to authorize a new issue.
SDRs are an important part of the global response to the pandemic. Lending their shares to less developed countries is not charity; the virus cannot be brought under control unless it is done globally. But a rich country like France should use another instrument, similar to SDRs, to take care of its own needs. It should issue perpetual bonds.
Perpetual bonds have been used for centuries. Britain issued perpetual bonds, called ‘Consols,’ in 1752 and later used ‘war bonds’ which are also perpetual to finance the Napoleonic wars. The US issued Consols in the 1870s. But the member states of the European Union are unfamiliar with perpetual bonds – although the first perpetual bonds were actually issued by the Dutch in 1648 to maintain their dikes. These bonds are still outstanding, but the annual interest payments are so small that few people are aware of their existence.
Not all the member states are in a position to issue perpetual bonds, but France is one of them. In Germany, the Bundesbank is in charge of managing the national debt and the President of the Bundesbank, Jens Weidmann is adamantly opposed to the idea. In the case of Italy, the credit worthiness of the country is in doubt, although the situation may improve now that Mario Draghi has become Prime Minister.
Issuing perpetual bonds would be particularly useful to France because it has guaranteed a large amount of loans many of which will not be repaid. The amount of loans guaranteed is €300 billion; the maximum amount of financial risk assumed by the state is €106 billion. The state is incurring many other expenses in fighting the pandemic. It will be possible to calculate the exact amount after the pandemic has been brought under control.
The national debt of France is already well in excess of the 60% of GDP prescribed by the Maastricht Treaty. Add to it the cost of fighting the pandemic and that indicates the scope for issuing perpetual bonds.
This is a very good time for France to issue perpetual bonds. As their name implies, perpetual bonds never have to be repaid, only the annual interest payments are due. Interest rates could hardly fall any lower. French bonds are already in high demand; if the amount outstanding were reduced to 60% of the demand would be even higher.
At first, until the market familiarizes itself with a new instrument, perpetual bonds may have to be offered at a discount from ordinary long term bonds, but eventually they would fetch a premium because with the increased demand, French perpetual bonds would become the largest and most actively traded issue on the market.
It should be emphasized that issuing perpetual bonds is an exceptional measure that should not be used in normal times. This requirement should be incorporated in the law that authorizes perpetual bonds. That should take care of any objection before it has been raised.