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AB 2000 studies

Alain Boublil Blog

 

French public debt : the serial goes on

Every year, in autumn, the debate about public indebtedness suddenly reappears, its excessive level and the threats it carries on the country. It is logical because it is the finance bill period, which, this year, is watched with more attention because it expresses the new president and his government choices. That issue has occupied a special place during the TV program devoted to the Prime minister and a personality had been especially invited to discuss with him, Thierry Breton, a former Economy minister and today CEO of ATOS, a French leading software company. Their discussion has been focused on the excessive level of France public debt and the risks it carries in case of an interest rate rise. Public is not much familiar with financial markets and viewers might have been impressed by the alarmist statements of both participants, amply repeated by a large part of the press. But when we look at that more precisely, we must admit that these statements were by far exaggerated and, for some of them, specious.

It is usual to dramatize the situation in order to make unpopular measures accepted. But the related measures must be consistent with the message. So, the paradox lies in the fact that despite the denunciation of the indebtedness excessive level, the State deficit will increase from 76.5 billion euro in 2017, following the latest estimations, to 82.5 billion. Between 2016 and 2018, the increase will approach 15 billion. That point is kept hidden by the fact that, related to GDP, total public deficit falls under 3%. We can be happy about it because France will go out from that humiliating position of being the last, among major members of the eurozone, to be under excessive deficit procedure. But that changes nothing to the point that a government shouldn’t denounce public debt level when it increases it.  

To understand financial challenges, it is necessary to make a distinction between problems created by the level of the debt and those resulting from its annual costs. At the end of the 2nd quarter, French public debt rose to 2232 billion, i.e. 99% of GDP, a lot more than the 60% appearing in European criteria, with the State counting for almost 1800 billion. These criteria had been adopted at a time when inflation, in France for instance, was near 4%. So, the real debt weight was reduced each year to the detriment of savers. But is that criteria still adapted to today circumstances? It is questionable because debt must be compared to household wealth and the yearly cost to their revenues. In that specific case, they are concerned because through taxes they are paying most of these charges. But their wealth grew in 15 years, according to the last published INSEE numbers, from five and half years of revenues to approach eight years in 2015 when their total wealth reached 10 700 billion and their financial assets 4800 billion. It has again increased from that year thanks to the real estate rebound and the rise of stocks prices. At the end, the ratio between household wealth and the public debt has been rather stable during the last 20 years and France solvency has not been affected. But is that situation a threat to France sovereignty because an important share of the debt is hold by foreign creditors? We should notice the polemist character of that debate because when foreign creditors share increases, we are worried about our sovereignty and when it falls we are also worried about our attractiveness. What is missing in that discussion is that in these numbers are included investment funds in bonds which are listed, for technical reasons in Luxemburg but which belong to French savers through their life insurance. And these one also detained a lot of bonds issued by other European countries. So the answer to the question about sovereignty is obviously No.

The second point regarding indebtedness is its cost. Thanks to interest rates fall it didn’t increase as it was forecast in previous finance bills but it fell. It would have fallen more if in 2015 and 2016 the French Treasury had not issued bonds at over-evaluated rates. That practice has almost disappeared in 2017 since the amount of issuance premiums, which are not included in the evaluation of the cost of the debt, fell to 6 billion against more than 20 billion during the two previous years. So the debt charge has not increased and even has started to fall. Regarding 2018, the Finance ministry has based its calculation on a strong rebound of interest rates reaching at the end of the year -0.1% for the three-months and for the 10-years bonds 1.85%. These forecasts are especially irrelevant because ECB has suggested that it postponed until 2019 any interest rate rise and that it will go on its quantitative easing policy in 2018. If the first hypothesis regarding short term rates carries little consequences on 2018 budget, the second one has no consequences at all because the interests of bonds issued next year will be paid in 2019. The evaluation of the cost of the debt in 2018 makes us also perplex. It  includes a 2.44 billion charge related to indexed bonds. But following Agence France Trésor tables, there are no indexed bond coming at maturity that year. So the real cost of the debt would be, in 2018, inferior to 38 billion, i.e. 3 billion less than this year.

The last alarmist argument of this serial regards the future consequences of an interest rate rebound, which is, for all that, far from being sure even if the ECB reduces its public debt acquisition program. The high level of household financial saving in France, which could even increase due to the tax reforms included in the next finance bill, guarantees that demand will stay high and large enough to contain an eventual interest rate rebound. Especially, French debt carries fixed interest rates and a rebound wouldn’t have any impact on past emissions. To have an effect on the budget, it would be necessary that new issuances carry an interest rate superior to issuances coming at maturity. It is unlikely. So, for instance, next October 25th, the State will reimburse a 32.8 billion bond carrying a 4.25% interest and for the last time it will pay a 1.4 billion interest charge. This reimbursement has been refinanced by issuances all along 2017 carrying as an average a 0.7% interest. That will generate a saving of more than one billion every following years. Even if there is a rebound of interest rates, the annual charge of French debt will be little affected due to the impact of passed falls. When Thierry Breton and Edouard Philippe have discussed these points, did they ignore that accounting reality or did they deliberately deliver an alarmist message, but which was groundless?

The debate about public finance would be more productive if it was about the utilization of public expenditures. If they are used to feed a more and more invading bureaucracy, to finance excessive medical prescriptions or to pay the consequences of the ignorance of local politicians who contract toxic loans, so yes, it is necessary to put a brake on public expenditures and to reduce indebtedness. But if these expenditures are used to prepare the future, to build infrastructures and collective equipments, to research or to revalorize pays civil servants pays who are essential to a good functioning of public services, so their increase is quite justified. It is these issues which should be at the center of the debate instead of fruitless arguments about risks which are artificially overestimated.          

 

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