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Alain Boublil Blog


0,4% : French ten years interest rate

Agence France Trésor has published today its TEC 10 index which reflects the 10 years interest rate offered by the State : it is going down to reach 0,4%. It has been inferior to this level only during few days, between April 2015 15th and 23rd. France still fully profit from the European Central Bank policy. It will generate this year a new and substantial reduction of the cost, for the State, of its debt. Contrary to the strong rise announced, against any logic, in the 2016 finance bill, this fall will permit a reduction of at least 5 billion euro. In 2015, the cost was 42.1 billion and last October, in the project presented to the Parliament, the government evaluated it at 44.5 billion for 2016. The truth will be much lower, probably around 40 billion. It is the figure which has been published in the latest AFT bulletin regarding OAT and BTAN interest costs. And the charge resulting from the indexation of bonds arriving at maturity in 2016 will be compensated by the negative interest rates on short term Treasury bonds

Why this gap between the approved estimation and the reality? Because the ministry of finance might want to keep, secretly, some rooms of maneuver if other expenses were exceeding initial estimations, since we are in a pre- electoral year.  So, it is not a wrong forecast on long term interest rate evolution since their evolution has no impact during issuance year. Regarding past issuances, we know exactly what they will cost since they carry a fixed interest rate. If an increase, which was highly unlikely, had occurred at the beginning of 2016, consequences, on the cost for the State, would have occurred a year later, so only from 2017. And to imagine that short term interest rates could have risen to the point to produce an extra cost of 2 billion compared to the previous year, was completely unlikely, due the public statements issued by the ECB.

Debt costs reduction could even be much faster and much important if the State stopped to follow this practice, open to criticism, which consists of issuing bonds carrying a much higher interest rate than markets ones and pocketing an issuance premium equivalent to an advance reimbursement of the high interest rates it will have to pay all along the duration of the bond. So, for instance, AFT issued last week 30 years bonds carrying a 3.25% interest. Investors ran to subscribe for a 2.9 billion euro amount. But as real market rate was, for this duration, around 1.5%, they accepted to pay 4.1 billion euro to get the bonds. The difference, the issuance premium, was 1.2 billion. It corresponds to the reimbursement, in advance, of the excessive interests they will receive all along the duration of the bonds, i.e. 30 years. In 2015, the total amount of the issuance premiums collected by the State, according to the Dassault report, has been near 17 billion euro. This year, it could be a little less since, until now, the State has collected only 7.5 billion. The counterpart will be debt costs in the future higher than those which would have been with the immediate and complete repercussion of interest rate fall on new issuances.

The reasons given for this financial policy is to feed past issued bonds markets and to increase their liquidity. It is not very convincing. It is possible to understand it for some issuances. But at this scale, these practices are excessive. The other argument is that these 17 billion in 2015 and these 15 billion in 2016 will feed State cash position and reduce its debt. But that represents less than 1% of its debt and, for its short term needs, it can find negative interest rates since the beginning of the year. Why not profiting of the situation instead of renouncing to the resulting receipts? During the last three months, every short term emissions carried interest rates near –0.5%. At last, if these issuance premiums were qualified as receipts, which they are without any doubt, and taken into account in the public deficits, that could allow, without tax increases, to fulfill more easily European criteria.  And it would be possible to understand this financial strategy, but it is not the case and the cost of artificially higher interest rates will be considered, itself, as expenses and included in future deficits.

So we will dare to make a suggestion: why don’t we use these enormous amounts of money, or at least a part of it, to finance investments or to subscribe to state owned companies capital increases? There is a rumor that some of them would need it! And, in addition, as they pay dividends much higher than the interest rates the State pays for its bonds, everybody would make a good deal, first the State, then these companies and, at last, taxpayers…        


  1. Isabelle Klein 06/15/2016 8:01 p.m. #

    Cher monsieur, vos articles sont riches! Riches en informations, en réflexions et en analyses. Il y avait bien longtemps que je n'avais pas autant apprécié la lecture d'articles économiques.
    Sincères considérations
    Isabelle Klein (votre voisine "de gauche" :))

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