Published as part of the ECB Economic Bulletin, Issue 3/2021.

The coronavirus (COVID-19) pandemic has reinvigorated interest in how governments finance their spending to an extent not seen since the global financial and euro area sovereign debt crises of 2008-12. Economic crises of such depth require governments to take decisions on how far the crisis-related costs should be financed by spending cuts elsewhere in the budget, by revenue increases and/or by incurring additional debt. At the same time increases in government debt raise questions as to the optimal financing strategy in terms of instruments and maturities, but also the investor base.

The composition of government debt has important financial and economic policy implications. Recent literature has pointed to the fact that the structure of government debt by holder can give insights into issues such as the diversification of risks in government debt issuance. It is also relevant to the strength of the sovereign-bank nexus and overall financial stability, the probability and effectiveness of sovereign debt restructuring, income inequality and the size of fiscal multipliers (see Section 2).

Against this background, the article first provides an overview of the evolution of the structure of public debt by holder in euro area countries since 1995. Literature on government debt composition has traditionally focused on distinguishing shares of domestic and foreign-held debt, with less emphasis on analysing a more detailed disaggregation by domestic holders. In this article we analyse more granular data on domestically held government debt to assess the role of non-bank actors in financial intermediation as well as the effects of the Eurosystem’s purchases of government securities on the composition of government debt by institutional sector (Section 3).

The article then explores in more detail the structure of domestically held government debt with a special focus on the household sector. With increases in the level of government debt and in the share of domestically held debt, an analysis of the public debt composition in terms of institutional sector becomes increasingly relevant, including the role of households as savings providers. For an assessment to be meaningful, the size not only of direct holdings by households should be considered, but also the size of their indirect holdings through investment funds, insurance corporations and pension funds. The aim of the article is not to provide a full picture or normative assessment of the ultimate owners of government debt but rather a factual analysis of the size and evolution of households’ holdings of government debt in the euro area, also in comparison with selected advanced economies (Section 4). For euro area countries this relies on the breakdown in the financial sector accounts ‒ known as the “who-to-whom” data ‒ published by the ECB and euro area countries. Similar datasets are available also for other EU Member States and the other advanced economies. […]