ECB’s Villeroy Says Debt Cancelation Would Be Dangerous Path

European Central Bank policy maker Francois Villeroy de Galhau has rejected suggestions that the institution should consider writing off the public debt it bought during the pandemic, saying to do so would backfire.

“To consider debt cancellation would be a very dangerous path,” the Bank of France governor told Ouest France newspaper in an interview. “When the euro was introduced, France, like the other states, undertook by Treaty to always reimburse the central bank. It is an absolutely essential pact of confidence.”

Villeroy’s comments were published after Italian Prime Minister Giuseppe Conte’s top adviser said the ECB could cancel the sovereign bonds bought under its pandemic program or hold them in perpetuity to help the euro zone recover.

ECB’s Villeroy Says Debt Cancelation Would Be Dangerous Path

Governments have built up huge debt burdens to save companies and jobs during the pandemic, and working out how to reduce them without harming the economy is set to be a key challenge after the crisis.

Italian cabinet undersecretary Riccardo Fraccaro told Bloomberg on Wednesday that the ECB should support nations in their recovery and that could include “canceling sovereign bonds bought during the pandemic or perpetually extending their maturity.”

ECB President Christine Lagarde has rebuffed such proposals before, noting that it would be illegal under European Union law. French Finance Minister Bruno Le Maire, standing alongside his Italian counterpart Roberto Gualtieri at a press conference in Rome on Thursday, said “a debt is paid back, that is the principle of debt.”

ECB Executive Board member Fabio Panetta hit a similar note, telling Portuguese newspaper Expresso that canceling debt “would contravene the Treaties.”

“We must remember that all debt is credit,” said Panetta, who is from Italy. “If we cancel a debt, we cancel the corresponding credit and this could have broader, destabilizing consequences. Only growth can protect us from debt.”

Still, the idea of canceling public debt held by the ECB is gaining traction among leftist parties in France. Jean-Luc Melenchon, a perennial presidential candidate who recently said he would run again in 2022, submitted a proposal to the French parliament in June to transform debts held on the central bank’s balance sheet into perpetual debt.

Arnaud Montebourg, a minister Macron replaced in Socialist President Francois Hollande’s government, has also said the ECB could cancel debt.

“My proposition is a concerted cancelation of all the Covid debts of euro are nations and a massive purchase by the ECB that would ruin nobody,” Montebourg said on Europe 1 radio on Sunday.

Montebourg also ran for president in 2017, but was eliminated in the Socialist primaries and had since abandoned politics to start businesses including one selling French-made honey.

©2020 Bloomberg L.P.

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