When concerns about public debt rise, there is always someone who dusts off an old idea: consolidate public debt.
We try to understand what it means and if it is possible.
The state offers services that it charges with taxes. When he spends more money than he collects taxes, the difference, called deficit or deficit (the surplus or surplus occurs when revenue exceeds expenditure) is financed by borrowing money from someone who has them, that is, from the saver.
If there is another deficit in the following year, the state goes into further debt. The debt grows fueled by annual deficits, reaching, as in the Italian case, to exceed the value of GDP.
The debt consists of government securities (BOT and CCT, for instance) which entitle the holder to receive an interest and, at the end of the security, the value of the security.
If I buy CCTs with a nominal value of 5000 euros, interest is periodically collected. At maturity, 5,000 euros were received.
If the state is always in deficit year after year, the 5000 euros will return them to me only further borrowing: it gives me 5000 euros but asks them to borrow to others.
The risk is not to find subscribers of BOTs and CCTs or to find them only by promising high interest, which will raise the costs for the state and signal a low creditworthiness of the state. In this case there is the risk of state failure, elegantly defined default.
Then there is the risk that, especially when the securities are maturing and need to be renewed, someone speculates against the securities of a state to make a profit and that speculation drives away potential investors, raising the rates to be paid.
Faced with this perspective, some politicians wonder: why not consolidate the public debt?
Consolidating the public debt means telling those who have securities: you keep them forever or for a long time because the state does not intend (at least shortly) to repay the capital when the securities expire. We will only pay you interest.
If a similar perspective became a reality, for many years a state could no longer place securities on the market: nobody would lend money to those who did not return them. Nobody would like CCT that does not give the right to the repayment of the capital and nobody, for this reason, would lend money to a state that consolidates the public debt.
Therefore consolidation is possible only in two cases: if the situation is desperate (better to consolidate the bankruptcy or if the state budget is in balance or in surplus , so as not to have to ask for money from the market.
But if a state has a budget in place, it regularly pays interest and renews the debt it does not need to consolidate the debt.