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Alain Boublil Blog


0.53% : the rate of the 10-year French bond

Challenging again forecasts, France continues to profit from historically cheap financing conditions. The 10-year rate published by Agence France-Trésor on December 5th, 0.53%, was at its lowest level for more than a year. This situation should last for most of next year, in contradiction with the figures published in the 2018 Finance bill. Three elements are supporting this trend. The most important is coming from the last decisions of the European Central Bank. Its quantitative easing policy is prorogated until next September through the purchase of bonds. Even if their amounts are reduced to 30 billion per month, the delivered message is strong and the institution gave itself the right to reinvest the produce of the bounds having reach redemption, which further increases the impact on the public debt markets. The second point is the persistence of a low inflation and a high household financial saving rate in the eurozone. Private appetite for securities is strong. At last, France benefits from a high trust from investors. The spread between French and German 10-year bond came back to around 30 basis points. Our country takes advantage from the many political uncertainties in Europe, in the United Kingdom because of the Brexit and even in Germany with the problems surrounding the constitution of a new government.

French State negotiable debt was, at the end of last October, 1680 billion, with around 140 billion in short-term maturities, these ones carrying a negative interest rate. For example, the last auctions, on December 4th, were subscribed with rates between -0.65 and -0.75%. They will bring in to the State tens of millions, as each week during the last two years. Most of the cost comes from the medium and long term debt. Its amount was at the end of October 1540 billion including near to 200 billion carrying inflation-linked clauses based on France and the eurozone.

French debt has been issued with fix interest rates. An eventual rise would have consequences only on new issuances and if these ones carried rates above those of the issuances coming at redemption. But we are far from that, even in the most pessimistic and highly unlikely case. For instance, in 2018, France will have to refinance bonds for about 55 billion which carry 4 and 4.25% rates. They have cost near 2 billion each year. If, and it is theoretical hypothesis because there is a very little probability that interest rates rebound so quickly, they are refinanced by issuances carrying a 1% rate, the saving, regarding all the coming years would be around 1.5 billion. As another reassuring factor, the maturity of the State medium and long term debt has increased to above eight years, which would reduce again the consequences of a return to interest rates as these used in the past.

The risk is not there. Even if the comeback of a high inflation in the eurozone has a low probability, its consequences on the State indebtedness costs would be significant because a share of that debt has inflation links. The cost of the indexation is taken into account the year of its redemption. So, in July 2020, an indexed bond carrying a 2.25% rate is coming at maturity and the State will have to add more than 5 billion euro, as a consequence of past inflation.  That extra charge will have to be included in the finance bill. That policy reminds us a period when France was not a very good pupil regarding inflation and the State through that policy hoped to reduce its borrowing costs through an indexation on the eurozone inflation. That time is over and it is difficult to understand why the Treasury is persisting in such practices. A major crisis could provoke a resurgence of inflation in Greece or in Ireland for instance, which has no reason to impact our public finances. There is no more advantage in issuing that kind of bonds. To cope with the concentration on one year of the charge of the past inflation, as it will happen in 2020, the State could decide to make a provision each year whose amount would be the annual indexation cost of the debt. It could be also sensible to use the resources created by the issuances premiums, which, even if they are much lower than in 2015 and 2016, represent in 2017 more than 6 billion, to buy back on the markets that especially costly debt.

The weight of the debt charge on budget deficits is not insignificant but it will not increase in the coming years, on the opposite to the alarmist declarations we frequently hear and it will even decrease. But progress must be done through a better management of that debt, to take a better profit of the deep and lasting fall of interest rates and to support efforts to reduce our budget deficit.. Speeches about the debt level and the consequences of a rate increase are without any basis. It would be much more interesting to debate about the use of public money.        



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