By Prof. Dr. Gancho Todorov Ganchev
‘Debts are like children – make them with pleasure, but raise them with pain’ Moliere says. Yes, debt is painful and as a rule, a country's debts are perceived as a burden that will rest on the shoulders of the future generations. And there is no understanding of debt as a tool to accelerate economic growth at all. In Bulgaria discussions on that topic completely ignore the relationship between government debt and monetary policy, and in particular, how the currency board regime affects debt accumulation and servicing.
It is true that excessive debt could lead to economic crises - as happened with the management of the Greek sovereign debt. However, there are countries which develop dynamically and with much greater indebtedness than Greece, and Bulgaria's relatively low public debt does not allow it to break away from the status of the poorest country in the EU.
But liquidation of the national debt could be extremely dangerous. It is enough to recall the consequences of the almost complete repayment of Romania's sovereign debt under the tragic government of Nicolae Ceausescu. In general, rising debt may indeed devolve some problems to future generations, but sharply reducing it puts the burden on current generations. Obviously, it's all about balance.
Gross government debt as a share of GDP. Source: Eurostat
As can be seen from Chart #1, gross public debt of Bulgaria is practically at the same level as in the Eurozone at the beginning of the second millennium, but it has subsequently fallen sharply to the current 25% of GDP. The question that arises is why most countries in the Eurozone and beyond can afford significantly higher levels of sovereign debt while maintaining high growth rates and high levels of welfare?
The reason lies in the relationship between monetary issuance, taxation and government debt in the context of a sovereign monetary policy. As it is known, with modern central banks that are not in the regime of a currency board, government securities occupy a major place in the asset structure. Central banks' liabilities include mainly banknotes in circulation and the reserves of commercial banks. In this situation, the seigniorage of the state, i.e. the income from the money issue is equal to the entire issue, plus the reserves of the commercial banks, which are practically invested in government securities.
This is because the liabilities of the government (government securities) are found in the assets of the central bank, and the latter are financed through the money issue. Moreover, that part of the government debt, which is financed by the central bank, is practically free for the state - the income from interest payments forms the profit of the central bank, which, in turn, is income for the treasury.
What is the situation in terms of currency board? First, the main part of the assets of the central bank of Bulgaria are foreign currency funds in Euro-deposits and securities of the countries of the Eurozone. BNB does not have the right to carry out operations on the open market and to buy Bulgarian government securities. Second, seigniorage does not include the entire money issue, but is reduced to interest income from investments in financial instruments in euros. Until recently, these revenues were negative, i.e. Bulgaria directly paid to be able to print money. The practical absence of seigniorage is a huge loss for the country. In essence, the currency board is a transfer of most of the seigniorage to the eurozone countries, as Bulgaria invests real resources in cash and securities denominated in euros.
In addition to the loss of seigniorage, the currency board assumes higher interest payments on the debt, since the central bank does not intervene in the Bulgarian government securities market and does not support the maintenance of lower yields on the government debt. The recent difficulties that the Treasury had in placing another tranche of debt government securities could practically not have happened in the presence of a sovereign state bank.
Let's imagine that Bulgaria joined the Eurozone. What would this change? Will Bulgaria gain or lose sovereignty as a result of this action and how will accession affect the financing of the national debt?
Around the end of 2021, the balance sheet of the European Central Bank amounts to EUR 680.1 billion. 65% of these funds are invested in the securities of the Eurozone countries, with approximately 90% of these investments being government securities.
At the moment, the balance sheet of the BNB's Emissions Department amounts to BGN 72.3 billion. 65% of this balance sheet number is 47 billion. The consolidated national debt of Bulgaria at the end of March this year equals BGN 32 billion. These numbers show that if Bulgaria were a member of the Eurozone or had an autonomous and sovereign monetary policy, it could finance practically all of its debt at the expense of emission seigniorage, i.e. effectively free for the state.
In this situation, even doubling the debt would not be a problem for the fiscal. This explains the simple fact that most Eurozone countries, or countries with autonomous monetary policy, have significantly higher public debts without financial problems. A currency board means giving up monetary sovereignty and huge losses from seigniorage and excessive interest payments. Entry into the Eurozone is not a loss, but a partial restoration of Bulgaria's monetary sovereignty within the framework of the collective monetary policy.
What has been said does not mean that, upon joining the Eurozone, Bulgaria could instantly change the way of financing the state debt. It will take time to change the structure of the BNB's assets. This will be possible gradually and within the rules and policy of the European Central Bank.
Even more important is the issue of the overall management of budget funds, part of which is the state debt. The management of public resources in our country is non-transparent, with suspicions of systematic corrupt practices. The efficiency and effectiveness of the use of state resources is low. Attracting additional borrowing makes sense only if the relevant resources are invested in public infrastructure, health and education. Otherwise, the rise in government debt could actually lead to a severe financial crisis.
THE BOTTOM LINE In general, rising debt may indeed shift some problems to future generations, but sharply reducing it puts the burden on current generations.
