Fixed-income executives across the globe are weighing in on a debate over whether governments and central banks should simply cancel the piles of sovereign debt they've accumulated over recent years to prop up developed economies.
The topic is front of mind for some executives because of the huge amount of money being printed by central banks and the trillions of dollars of fiscal spending — major tools used by advanced economies in efforts to curb the economic impacts of the coronavirus pandemic.
The options are clear: Write it off or pay it back. But the path to arriving at one of these conclusions is less obvious, sources said.
Some think canceling debt should be in governments' and central banks' toolkits.
"The reason this matters is because everyone is sitting round today saying, 'Oh my God, we've got a pandemic going on, governments are spending money left, right and center and we're going to be paying the bills of this for years to come'" through higher taxes, for example, said Mark Dowding, London-based CIO at BlueBay Asset Management LLP.
While the need to raise taxes to repay this debt may be the perceived wisdom, "my argument is it doesn't need to be repaid. Intrinsically, central banks have bought that debt and it sits on their balance sheet and could sit there forever. In bond markets, nobody is expecting those central banks to pay back to the market ever, and essentially … it becomes almost like an accounting equation: You owe yourself money. It doesn't really matter. (Governments) could almost afford to forget about that debt or ostensibly cancel that debt," Mr. Dowding said.
The Bank of England, for example, could switch the maturity on all the gilts it owns to 10,000 years and with an interest coupon of zero. "If they wanted to do so, they could do so. The relevance is understanding that when you look at this metric of debt to GDP … you don't need to do anything about it at all. We do not need to condemn our populations to another lost decade of austerity," Mr. Dowding said.