Last week’s contribution referred to fiscal sustainability. I also referred to the claim made by an IMF analyst that: “Fiscal frameworks actively discourage investment and imply pro-cyclicality and tightening at the most difficult times”. He also stated that reducing the level of gross government debt should be the focus of the EU’s governance regime and that the evolution of the debt-GDP ratio should be the single fiscal target to aim for.

This week I want to focus more closely on the structure of the debt of the government of Malta. At the end of 2013, general government debt amounted to €5,2431 million. This amounts to 73 per cent of the gross domestic product, while in the whole of the EU, the average debt burden is just under 90 per cent of economic output. The EU rules state that public debt should not exceed 60 per cent of the GDP.

Like many others, I have been asked several times why the question of sovereign debt that has hit so negatively countries like Ireland, Greece, Spain, Portugal, Italy and others, has not hit our country as well. The answer is quite straightforward. The peculiarities of the structure of general government debt provide the answer. This does not mean that we do not have a challenge to face as we need to remind ourselves that local government debt increased by €1 billion in the three years leading to the end of 2013.

On a yearly basis, we can keep the fiscal deficit to a sustainable level. However, the total amount of debt keeps creeping upwards

The main peculiarity (and I refer to it as a peculiarity as I do not know of any other EU member state that is in the same situation) is that our debt is predominantly local in nature. Just 0.1 per cent of our debt is denominated in a currency that is not the euro. As such we are not exposed in any way to a currency risk when we come to pay back this debt.

Another important element that confirms the local nature of our debt is that just 7 per cent of the debt is held by the rest of the world. The bulk (just over 60 per cent) is held by financial corporations such as banks, collective investment schemes and other institutions. The public and non-profit institutions hold 31 per cent of the debt.

This exposure to individuals as opposed to institutions, in a capital market that is highly illiquid, provides a strong element of comfort when it comes to the rollover of government bonds.

For many individuals, the purchase of government bonds is the only alternative option they would consider to a savings account. Admittedly, some of the local banks that hold government bonds are foreign owned, but the interpretation of many financial analysts is that unless government adopts the wrong economic policies, they are unlikely to want to dispose of them.

One other important aspect is the cost of borrowing. In the first six months of this year, it amounted to €111 million, representing over 6 per cent of total government expenditure for this period. The average interest rate applicable to the whole nominal debt is 4.29 per cent, down from 4.53 per cent.

Moreover, it is likely that it will go down further in the coming years, as the government replaces bonds that carried interest rate coupons of over 7 per cent with interest rate coupons that are much lower.

The average remaining maturity of the debt is seven years and nine months (93 months) compared to the five years and 10 months (70 months) in 2010. This again would imply that the cost of borrowing will not rise significantly even when interest rates go up.

In the first six months of this year, general government debt has continued to rise and has reached €5,484 million. Going back to the contention of the IMF analysts that I referred to above, this is probably the most worrying feature of our national debt.

We have shown that on a yearly basis, we can keep the fiscal deficit to a sustainable a level. However, the total amount of debt keeps creeping upwards.

It may make economic sense to have a strategy that would reduce total debt. However, we need to keep in mind that such a strategy would pump cash into the economy.

Thus the downside to this strategy is that if our economy does not have the capacity to absorb this additional cash, inflation could rise to an unsustainable level.

Hence the answer to question as to whether the government should reduce the total level of national debt is not so straightforward.

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