Questions about the usefulness of repaying one’s debts have recently multiplied in public debates. This study shows that paying off one’s debts actually allows us to avoid significant costs down the road. It opens with an observation: in France, between 2009 and 2019, both the private and public sectors have become more indebted. Although the situation has not become serious, our country is nevertheless an exception among the major developed economies. The study then explores the outlook. An increase in debt-to-GDP (gross domestic product) ratios is occurring in 2020, particularly for public administrations. With the exception of some emerging economies, however, the likelihood that governments will not be able to access markets remains generally low.

Nevertheless, there have been calls to alleviate the debt burden through various subterfuges, often involving the central bank. This is a dangerous illusion. Rather than engaging in a game of sorcerer’s apprentice, it would seem more reasonable, where public debt has reached very high levels, to control it through traditional adjustment mechanisms.

Private agents will have to adapt their asset management to the changing context. In the wake of the health crisis, access to bank credit can be expected to become more difficult for businesses and households. Beyond this, two contrasting scenarios are envisaged. The first, which is based on the implementation of adjustment policies in the most indebted countries coupled with structural reforms, leads to a preference for shares. In the second scenario, with inflation at the level of the 1950s and 1970s, recourse to debt benefits the wealthy.

This study was written by Christian Pfister, Associate Professor at the University of Paris-I- Panthéon-Sorbonne and Sciences Po, and Natacha Valla, Dean of the School of Management and Innovation at Sciences Po.