Monetary policy and public debt What is the impact of central banks’ prime rates on countries debt? / Patrick SWIETON / 2022

Titre : Monetary policy and public debt What is the impact of central banks’ prime rates on countries debt? Type de document : Mémoire Auteurs : Patrick SWIETON, Auteur Année de publication : 2022 Importance : 27 p. Note générale : Pour accéder aux fichiers PDF, merci de vous identifier sur le catalogue avec votre compte Office 365 via le bouton CONNEXION en haut de page. Langues : Anglais (eng) Mots-clés : Management POLITIQUE ECONOMIQUE ; BANQUE CENTRALE ; DETTE Résumé : In 2020, the world is hit by the most important sanitary crisis over the past hundred years : the COVID19 disease. Many countries, among the most developed ones, were very impacted and pushed to apply various containment policies. Such decisions created a sharp decrease in their economics activities as many sectors had not been able to work as usual or were closed during months. To face this situation, many governments started an historical support policy to preserve their economies. As an example, we can quote the French president Emmanuel Macron at the beginning of the crisis: “L’Etat paiera”, meaning in English “The state will pay”, regarding the special expenses that the country was about to face. However, this sentence hides a different reality. As the economy was slowing down and expenses going up, it became obvious that the state, as many others, will need another source of financing than the annual budget to generate these helps to the population and the different recovery policies. As often in crisis, countries turned to financial markets and made new debts in the form of treasury bonds. This leads to a huge rise of public debt, like in the United-Stated where it moved from 23 at 30 trillion USD between 2019 and the early 2022. Across the past decades, successive crisis increased countries debts to a point where its sustainability became one of the main political issues. Nevertheless, crises may not be the only responsible of this general upward trend of the indebtedness. Indeed, the role of central banks is more and more pointed. Responsible of the monetary policy, those special banks benefit from many tools to affect the economy. One of the most important one being the prime rates, by which they can fight against inflation by raising them or motivate the economy by decreasing them. Of course, in crisis time, they are often decreased to help the economy to recover. For instance, the European Central Bank (ECB), moved down its rates by more than 3% in the 2008 financial crisis. However, this technique is so useful that central banks have difficulties to rise them again as much as before once the crisis over, leading to a general downward trend over the last four decades. Thus, the American central bank, called Fed (for Federal Reserve System) saw its prime rates moving from 20% in the early 1980’s to less than 1% in 2009. The former French Bank governor highlights that the unprecedented public debt levels go together with unprecedented central banks policies, including historically low prime rates (Politique monétaire et dette publique, RSF Revue de la Stabilité Financière, 2012). To better analyze this correlation, we need to understand what those rates are. The most important ones are the deposit rate and the refinancing rate. The first one is the rate at which commercial banks deposit some of their funds at the central bank. The second one, called “refi” in the ECB and “repo” in the Fed, is the rate at which commercial banks can finance them by borrowing at the central bank. As we will develop later, both have an impact on the rate at which countries can borrow funds on the market, meaning that a fall of prime rates lead to a fall of treasury bills, notes, and bonds. The previous reasonings and economical facts caught my interest to more investigate the link between prime rates and country debt, in expenses and volume. A relationship would mean that central banks policies have a direct power on country’s finance. This brings me the objective of this paper. Programme : MSc Financial Markets & Technologies Permalink : https://cataloguelibrary.neoma-bs.fr/index.php?lvl=notice_display&id=565306