TEC-10 index, published by Agence France Trésor, which measures interest rate paid by the State on its ten years bonds has reached on July 1st, an unprecedented level : 0,17%. It had fallen last Monday, after the announcement of the results of the British referendum, and had come back to the low levels attained during a few days, in April 2015. But the fall was amplified at the end of the week. Investors have chosen the safest assets when financial markets were confronted with a confidence crisis reflecting worries generated by the Brexit vote. But if stock markets have since regained at least half of their lost, interest rates have continued to fall. Markets consider that central banks policies, including Bank of England, as its governor, Mark Carney, has confirmed, will become more accommodative than it was expected and on a longer period of time. It is also the implicit message delivered by Mario Draghi. This scenario is definitely neither the one the ministry of finance, in France, had forecast a few weeks ago regarding public finance evolution, nor the one chosen by AFT which manages French state debt.
This is bad news for German and Dutch pensioners, current and future ones. And it is worrying for corporate and financial institutions, including in first position pension funds, which offered contracts on the base of defined benefits. These ones, due to the current level of interest rates, will be more and more difficult to be honored since a substantial share of the benefits is financed by the interest paid on bonds issued by States. We can expect a new wave of criticism by pensioner main supporter, the German finance minister, Wolfgang Schauble. But it will not have a negative impact in France since our pensions are based on a distribution system. Active employee contributions are paying retired people pensions. Regarding this point, we don’t anymore hear those who were supporting other methods to finance pensions, through capitalization, for instance with pension funds.
What are the consequences of this new situation for the French economy? First, there is a negative impact on commercial banks due to low interest rates and flat rates curves. One of their most lucrative business consists in using deposits and, if needed, short term borrowing to offer long term loans in playing on the difference between the short and long term interest rates. But the difference, currently, is near zero and it affects their profitability. In return, low interest rates are good news for households who want to acquire their home and we see a rebound, certainly modest, in the building sector, but which is a reverse with the three years fall we have registered. We see the same positive impact for new car registrations. The substantial rebound (+8%) during the first half of the year is closely linked to the fall of financing costs which made leasing proposals especially attractive.
It is also very good news for business whose financial costs are falling, which is not without consequences on the recovery of their operating margin we see for a year. But it is too early to expect a real investment rebound since the banking regulation toughening, since Basel III notably, provokes timid attitudes in banks behavior with companies. In fact, the first of all beneficiaries, in France, from the interest rate strong and durable fall is the State since it is the first borrower in the country. But everything seems to be done to minimize the positive impact of the interest rate fall through AFT practices. Regular readers of our site have been informed long time ago about this curious habit which consists in offering investors artificially high interest rates on bonds issuances in order to give the State the possibility to pocket issuances premiums. This remark, until now, did not give rise to many comments. Since that, Cour des Comptes, the French public accounting body, got hold of the issue and has increased our valuations. So, in 2015, the State pocketed 22 billion euros instead of 17 we initially calculated. The media had to take an interest in the issue and AFT had to present a justification of its practices. We remind that the consequences, for public finances are very negative since these premiums are not considered as fiscal receipts. They are not included in the evaluation of the budget deficit of the year; but it slows the reduction of the cost of the public debt for the following year. AFT explanations are not at all convincing. Argument relative to the liquidity of past bonds issuances could be heard if France had problems with investors. But they are in a rush to buy French bonds and most of them keep them all along their duration. Daily transactions on French debt, around 10 billion euro according to AFT, are low compared with its size, about 1500 billion with 70 listed bonds for mid and long term emissions. Regarding AFT point about the fact that premiums reduce short term financing needs, it is stupid since short term interest rates are negative (-0.5% last week) for every emissions with a duration inferior to one year. So the State is deprived of the payment it would receive from these emissions with negative interest rates. To reduce short term financing when investors are ready to pay for it is nonsense.
As these practices have necessarily received the support of the minister who supervises AFT activity, we have to note that if someone wanted to do whatever he can to deprive France to take advantage of the ECB policy, he would not act differently. Anyway, despite Cour des Comptes remarks, these practices will go on since July the 7th AFT will issue bonds carrying a 4.5% interest with a duration of 25 years. We can bet on a 60% premium, at least. If the emission is around 2 billion, the State will pocket 1.2 billion more. This policy is incomprehensible since the State is committed, under the 2016-2019 stability program, to reduce coming years deficits and it is deliberately depriving itself, in following this pace, to the positive impact of the interest rate fall on the cost of its debt and on its future accounts.