To whom do the countries pay their debts

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Governments around the world are putting together unprecedented aid packages to cushion the economic consequences of the corona pandemic. Who pays for all of this? SWI swissinfo.ch prepares you for the discussion at the virtual round table.

This content was published on February 3rd, 2021 - 9:00 AM

Vaccines, hardship cases, short-time work. The list of Swiss aid payments is long. Last year alone, Finance Minister Ueli Maurer had to raise CHF 20 billion for this. Another 15 billion francs will be added this year.

The situation is similar abroad: France took out 260 billion francs in debt last year. In the United States, the national deficit is CHF 2,780 billion.

In newspaper articles, on television and on social media, financial experts explain the advantages and disadvantages of this development. It's not easy to understand.

We want to change that. With us you will find out what you need to know about national debt.

What is a government deficit?

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The government deficit is the difference between government spending and tax revenue. So if a state spends more than it earns, it runs a national deficit. Finance Minister Ueli Maurer's job is to find someone to pay the shortfall.

What is national debt?

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The national debt is the accumulated national deficit. So deficits increase the national debt. In contrast, government surpluses reduce debt. Switzerland has reduced its national debt by around CHF 30 billion since 2003.

What is a good measure of national debt?

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The level of indebtedness of a state is usually expressed as a percentage of economic output. The Swiss national debt is currently around 48 percentExternal Link of the Gross Domestic Product. Switzerland would have to work around six months to repay its national debt. In Japan, the national debt ratio is 266 percent.

How much debt can a country incur?

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The Maastricht criteria of the European Union stipulate that a state may incur no more than 60 percent of its economic output. This limit value is arbitrary. Whether a country's debt level is sustainable is determined by economic growth and the level of interest rates. If interest rates are lower than growth, the national debt ratio will automatically decrease over time.

So states can run up a lot of debt. Another question is whether Ueli Maurer will always find someone to finance his deficit.

Who is eligible as a donor?

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The banks are sitting on huge sums of money. The reason for this is monetary policy. In Switzerland, the National Bank has bought foreign currencies worth around CHF 670 billion from banks since 2008.

The aim of these purchases was to prevent the franc from appreciating too much. With the newly created money, the banks could cover the national deficit.

Where is the money in the banks?

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The banks' money is held by the Swiss National Bank (SNB). The banks all have an account with the SNB. There they are currently charged a negative interest rate. So the banks are losing money. So they want to get rid of their money.

Where does the money from the banks go?

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There are only two ways a bank can withdraw its money. First, it can buy something from another bank. For example, UBS can try to steal a property from Credit Suisse. However, Credit Suisse also pays negative interest on its account. So she has no interest in UBS's money. Second, the banks can leave the money to the state.

Can't the banks lend their money to closed businesses (restaurants etc.)?

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No. Banks can only pass their money on to another bank or to the state. When banks lend a company or household a loan, they create new money.

Ueli Maurer could therefore have his national deficit financed by the banks. In order for the state to get the money from the banks, it usually has to pay interest. But today everything is different.

Why can Switzerland borrow at a negative interest rate?

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The banks pay negative interest of -0.75 percent on balances at the National Bank. A return of -0.25 percent already seems tempting. For this reason, the federal government currently only "pays" around -0.3 percent in order to be in debt for 50 years. The banks give Ueli Maurer money when they are allowed to give him money.

Should Switzerland take on more debt?

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It is a political question. Against this is the fact that today's debts could be tomorrow's taxes. That would be the case in particular if a state bankruptcy should be on the horizon. The fact that government debt does not have to be repaid as long as interest rates are low speaks in favor of greater debt.

But one thing is certain: there is enough money.

Fabio Canetg

The author holds a PhD on monetary policy from the University of Bern and the Toulouse School of Economics. Today Fabio CanetgExterner Link is a lecturer at the University of Neuch√Ętel. As a freelance journalist, he writes for SWI swissinfo.ch and the Republic. He moderates the monetary policy podcast "Geldcast".

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