PRAGUE -- There is a palpable schizophrenia concerning public-sector debt. On one hand, a high proportion of public-sector debt relative to gross domestic product is seen as a warning sign that a country is suffering from macroeconomic imbalances. Similarly, a high ratio of government debt to total debt is generally considered to be incompatible with long-term economic growth.
On the other hand, there is a widely held belief that the existence of government debt is actually good for the economy in that it helps stabilize local debt markets. The introduction of government instruments with a wide range of maturities is also thought to strengthen local financial markets. As such, it is often argued that full redemption of outstanding government debt is undesirable.
This latter view is based on a notion that the overall effectiveness of bond markets depends on government bonds acting as a "riskless" investment to serve as a benchmark against which other securities are priced. Without this component of the bond market, capital markets would be undermined and the risks of holding other securities would increase so that borrowing costs would rise.