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AB 2000 studies

Alain Boublil Blog

 

Debts : heading to the next crisis ?

Moody’s rating agency has downgraded last week China sovereign debt notation. It echoes the numerous alerts about the excessive indebtedness of local authorities and state-owned companies. On the opposite, the State debt ratio (48%) would make many countries dreaming about it. That decision did not provoke any concern to financial markets. Shanghai, Taiwan and especially Hong Kong have followed their rise with, for the last one, a 16% increase since the beginning of the year. The Chinese risk is, in fact, overestimated and it is not new. The country has a huge current account surplus and currencies reserves above 3000 billion dollars. In case of problems, the central bank could support troubled entities because they only marginally depend from foreign creditors, at the opposite of English-speaking countries  and, but for a less important amount, France. In Asia, China is not the only country which alarms with its zombie companies, whose nickname is caused by their indebtedness. South Korea, which was, in the past, a model for innovation and competitiveness, has the same problems.

In France, the endless debate about “bankruptcy” and the risks public deficits would carry has temporarily stopped. The Treasury has issued the day after Emmanuel Macron election a new 30 years bond carrying a 2% interest rate. It got a triumphal reception and received subscriptions for 31 billion euro, i.e. eight times more than it was offered. The State profited of it in increasing its offer and has collected 7 billion euro. Investors do not anticipate a significant interest rate rise in a near future. This success brings a stinging denial to the many Cassandra which are full of comments in the media and whose anxiety is without any proportion regarding, for instance, the Front national devastating proposals about France exit from the eurozone. We had to wait until the debate between the two rounds of the presidential election, to see Marine Le Pen, having to answer the questions of her adversary and giving confused arguments to allow French people to discover why that proposal was irresponsible. It should have been more logical that obviousness appears during the interviews proposed by journalists who were hurrying to invite her to expose her ideas.

France, in the future, will take advantage of favorable conditions to finance its economy and will reduce, year after year, the cost of its indebtedness if, however, it does not come back to the questionable practices of the years 2015 and 2016 in accumulating issuances premiums. The case did finally shock the highest authorities and that practice had been abandoned at the end of last year. But Agence France Trésor, taking advantage maybe of the appointment of inexperienced ministers, has just announced a 15 years bond carrying a 5,75% interest rate, five times higher than the market rate, due to be issued June 1st. Tax payers will have to pay an artificially high charge all along that period. Let’s hope that the new government will understand quickly the point and will put an end, as the previous one, to these practices. Anyway, the constant success of the French debt issues shows that if a crisis must occur, it won’t come from France. It is not possible to say the same thing about England, hurt by Brexit perspectives and about the United States because of its indebtedness, which is becoming worrying, and of the Trump administration economic choices.

Public and private debts of these two countries did again increase. As they carry heavy current accounts deficits, they depend from the financial markets willingness. It makes us remember the context prevailing before the crisis of 2007-2008 with a solid growth which generated admiration of economists. The following events proved they were wrong. The current situation results both from expansionist monetary policies and from the deepening of the inequalities. Households are offsetting the stagnation of their revenues in borrowing with the blessing of the banks. In the U.S., debt levels are again alarming with a private debt near the peak reached at the beginning of 2008, with 12 500 billion dollars, but with a different structure. Mortgages are stagnant but student loans and auto credits rose sharply with a total amount superior to 2 500 billion dollars and a default ratio higher than 10%. Their English colleagues are not any more protected by their universities which are becoming more and more business oriented in their management with very expensive tuition fees, breaking with a hundred year old tradition. These loans, like mortgages ten years ago have been massively securitized, which could have heavy consequences. The car registrations stagnation, since the beginning of the year in the U.S. reflects now the growing anxiety of the lending institutions.

The financial situation of local authorities in the U.S. is not better, even if they have a favorable tax environment. Private subscribers of “municipal bonds” don’t pay taxes on the interests in most of the States. The total exposure is near 3 000 billion dollars. The lessons of Detroit default in 2013 have not been learnt and the free state of Porto Rico has just missed its payments on its 70 billion dollars debt. At last, the situation of these local authority pension funds as those of many companies is not more reassuring since rating agencies have downgraded some of them and defaults are growing. International comparisons overwhelm France because of the excessive burden of its compulsory levies. It mainly results from the way we take into account pension contributions, which are collected by public entities. If we look more closely at that situation, and if we observe the situation of the pensioners of American local authorities or of many English and American companies, this high ratio should comfort us instead of alarming us.

These dangerous evolutions are not new but they occur at a time when the new administration proposes a costly fiscal reform and an investment program in favor of infrastructures whose amount has been estimated at 1 000 billion dollars. But the federal debt is approaching its ceiling and the Congress will have to vote in favor of its increase during summer. It always generates political tensions. Donald Trump economic policy will be confronted to his country structural weaknesses. His project to amend the financial regulations which had been adopted after the crisis, even if senators and representatives will be difficult to convince, is a new factor of fragility.

The world economy has enjoyed during the last ten years a steady growth, if we set aside the eurozone which went through difficulties between 2010 and 2012. It is an unusual long period regarding historical cycles. It is not sure that we can go indefinitely without accident. Regarding the scale of the risks, Donald Trump wish to take his distances with the Paris Agreement, which, it needs to be reminded, carries no formal obligation, will attract a lot of comments, but it must not be overestimated. On the contrary, his economic strategy, due to the country heavy indebtedness, creates a threat which must not be underestimated.    

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