Would it Help to Buy Bonds from the Government?

Readers Question: If all Greeks native or from abroad (or any other country in debt) bought their own bonds would this make the debt much lower?

No, it would not make the debt any lower. But, it would help to finance the government’s deficit. It would make it easier for the government to avoid a debt crisis. If sufficient people bought government bonds then it would reduce the interest rate on government bonds. The advantage of this would be:

  • Lower bond yields (lower interest payments) saves the government money. Many European countries suffering a debt crisis are hurt by the cost of servicing their debt interest payments. This is particularly a problem for countries like Greece, Spain and Italy where bond yields (the cost of borrowing) are close to 7%. If these interest payments could be used to repay debt, it would be much easier to reduce the debt to GDP ratio.
  • It would give the government more time to reduce debt without painful austerity measures. Greece is probably too late. But, European countries with high debt ratios were forced to pursue austerity measures to try and reduce the deficit. These austerity measures led to lower economic growth (and lower tax receipts) and harmed the state of the economy. But, if the private sector buy bonds there is less pressure to cut spending.
  • Reduce the need for a foreign bailout. Countries like Spain and Italy may require some kind of foreign bailout. This is when they borrow from the EU or IMF to meet their shortfall. The problem with having to borrow from abroad is that lenders (e.g. IMF, EU) are likely to insist on certain criteria (e.g. spending cuts, privatisation) as part of the deal. If citizens bought sufficient bonds, then there would not be this need to borrow from abroad.

Italian campaign to buy Government bonds.

In Italy, there is campaign to encourage people to be patriotic and buy government bonds. (e.g. Italian footballers encouraged to buy bonds). Italy’s debt is a paradox, their total amount of debt (private + public) is quite low by international standards. They have a primary budget surplus. So if successful, the government could see a significant reduction in borrowing costs, and it could help to avoid a debt crisis.

The problem is that if some patriotic investors buy bonds, other investors may take advantage and sell their bonds as the price rises. It would require a huge intervention from ordinary investors to overcome the Italian debt crisis.

Would it Work in Greece?

I’m not sure if Greece could avoid a debt crisis. The scale of government debt is so large, I don’t know if there are sufficient levels of private sector saving in Greece to rescue the situation. i.e. even if everyone used every saving to buy Greek government bonds, it may still not be enough for the government to avoid default. It depends on level of private sector savings compared to government debt.

Would Printing Money Reduce the Value of Debt?

A country with its own currency and own Central Bank could print money and use this money to finance the debt. This doesn’t reduce the debt, but it makes it much easier to finance. In a way it is reducing the real value of the debt.

The problem is that printing money could cause inflation. This would reduce value of existing bond holders. Investors may become very reluctant to buy bonds from a country where the government prints money and creates inflation – Because inflation is effectively reducing the real value of savings.

However, in some circumstances, such as liquidity trap, printing money may not cause inflation and can help to avoid liquidity shortages.


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