After having been close to the symbolic rate of 1%, as last year at the same period, the French 10 years bond has significantly fallen back to stay around 0.70% since the beginning of April. The issuance launched April 5th with maturities running from 10 to 30 years has collected near 8 billion euro and that number will be increased to 8.6 billion including NCTs after auctions. Thanks to the rate fall, it will contribute to a new reduction of the cost of the French public debt because it will participate to the reimbursement of a 27 billion bond coming at maturity this month and which carries a 4% interest rate. Public indebtedness is at the center of the political debate with the SNCF crisis and it is not useless to have a more rigorous appreciation of France financial situation.
The persistence of very low interest rates, despite of the numerous forecasts anticipating, on the contrary, a rise all along the current year, should satisfy the government. It shows the financial markets trust about France. The spread with the German bonds assorted with the same maturity has considerably been reduced and hardly reach 25 basis points. These financial markets show their welcome to last European Central Bank decisions. The quantitative easing program will come at its end, as expected, this autumn but, there is new concept which has gone unnoticed: it will only concern net buys. ECB will have the possibility to reinvest the cash coming from the reimbursement of the bonds arriving at maturity. Regarding the stock of accumulated bonds, this capacity of intervention on the States bonds market is not negligible and will continue to weight on interest rates level.
The other good news for the French state is the –slight- rebound of inflation. In March it reached 1,5% on an annual basis when the average during the last four years was 0.5%.Now, for the mid and long term maturities, the real interest rate will be negative when, during the past years, it was only the case for the short ones. As another favorable consequence for public finances, the elasticity of social and fiscal receipts is by large superior to 1, as that has been verified in 2017. The State and the public administrations will take a double advantage of this original configuration. The annual cost of the debt will fall and the public deficit will continue to be reduced, measured in absolute terms if good management efforts are pursued and even more in relative terms because the value of GDP, which is the denominator of the famous ratio included in the Maastricht Treaty, will grow faster as inflation is rebounding.
That new situation provokes two comments. Regarding the management of the public debt, an end has happily been put to the drifts observed in the past with issuances carrying highly superior rates that market ones and the collection of emission premiums which were not included in the calculus of the budget deficit. That practice has been significantly reduced in 2017 and its progressive abandon has been confirmed during this first quarter, with one or two exceptions. But another aspect of the issuance policy is starting to worry, with the use of zone euro inflation indexed bonds. The benefit, regarding the level of interest rate is negligible. If the subscriber accepts to receive every year a little smaller remuneration, it is because he anticipates that will be compensated, at the maturity of the bond, by a reevaluated reimbursement based on inflation. The point that France issues bonds indexed on its own inflation is logical because the country trusts its ability to keep under control what was, in the past, one of its major weaknesses. But the fact that the State takes the risk, in exchange of a very small and even tiny rate reduction, to have to pay, in case of a major crisis in other members of the eurozone, a heavy charge is difficult to understand. In 2020, we know already, that will generate an exceptional charge as high as 5 billion euro. At the end of March, such an issuance has generated a record demand from subscribers, as high as 11 billion euro which, fortunately, as been satisfied for only 3.5 billion. The enthusiasm which has been aroused is worrying.
Regarding public indebtedness, France is not an isolated case. Japan forever and the United States are much more indebted than our country without that generates as lively polemics as here, and more an exaggerated alarmism which was constantly infirmed by facts. That indebtedness is not the consequence of ideological or theoretical choices. It is usual to oppose liberals to Keynesians. The first ones denounce the excess of the State when the others recognize, in its action, the mission to restore macroeconomic equilibriums when market forces fail to achieve them. But the Anglo-Saxon world, by nature close to liberal thesis, is highly indebted, if not even more, than European social democracies.
The real criteria, for any judgment, depend of the answers given to two essential questions: how the debt is financed and what is its purpose. In the French case, it is mostly covered by household financial savings. Life insurance, by itself represents 80% of it. So it is money French people lend to other French people. Regarding future generations, who are frequently quoted as the victims of this policy, they will inherit, in the same time of the debt and of the money to reimburse it. They will also benefit of the equipments which have been financed by the debt. It is why the real debate should be about the nature of public expenditures more than on the way they are financed. Current controversies about SNCF, its debt and the supposed excesses of the “all High Speed Train” model are revealing. Its detractors are mainly elect who didn’t get a line serving their region. We also have to note that, in every project, these elect exercise pressures to obtain that the new line comes near their areas and, especially, that the trains stop there the highest number of times every day.
The residents in these areas, when they decide to put on sale their home are not the last ones to publish in their ads that they are located “a few minutes from a HST station”, which, usually, generates a price rise of their property about 15 to 25%. These public investments financed by debt, and we could add the other major infrastructures, power plants or communication networks, benefit to everybody and not only to their users, through regional development all along their life, which goes by far beyond the maturity of the loans which have permitted their construction. They generate real wealth creation. So the public debt trial is inappropriate, especially when, due to the exceptional economic environment France benefits, the cost of this public funding has never been so cheap and allows the realization of projects which could not have been achieved otherwise.
It is when long term interest rates are low, under 1%, that investment must be decided. And that was the analysis made by monetary authorities, who were at the origin of their fall. And not when rates rebound, if that must occur.