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Alain Boublil Blog


0.70% : 10 Years French bonds rate

At a time when French government economic policy is violently questioned, due to the increases on household taxation and the social levies affecting retired people and to the de-indexing of all the social benefits including pensions, financial markets are infirming the forecasts made by the minister of Economy. The benchmark rate for the 10 years bonds the French State issues to refinance its debt when it comes to maturity and to cover its budget deficit is staying, on December 3rd at a very low level: 0.70%. It has fluctuated in November between 0.70% and 0.82%. This situation brings a stinging denial to the alarmist comments about an unavoidable interest rates rebound and its consequences on French public finance, risks which had been put forward, among others, to justify the worsening of the austerity policy decided last year.

The mid-term planning finance Bill for the 2018-2022 period voted in December 2017 was based on the hypothesis of a 10 years bond rate at the end of 2018 at 1.85%. It was supposed to reach, at the end of the following year 2.60% and 4% at the end of 2022. These forecasts were completely unrealistic, as shows the level pointed out today but they had a double advantage. They alerted about the risk of an excessive indebtedness and strengthened the message about the necessary budgetary rigor. Toward Brussels, they allowed, through artificial increase of the debt charge, to reduce, quite also artificially, the public finance primary balance because this one is calculated in deducting from the total deficit the cost of the debt. So France was complying more easily with Maastricht Treaty rules.

In fact, real interest rates, i.e. after the deduction of prices increase, have not increased but have strongly fallen. In 2016, inflation was 0.5% and 10 years interest rate at the end of that year was 0.45%. Real rate was near zero. Today, with a 0.70% rate and an inflation rate at 2.2%, according with the latest figures published by INSEE at the end of November, the rate is now negative at 1.5%. The State takes advantage of that situation since it is highly indebted but there are also losers: the freezing at 0.75% of the interest rate offered on “Livret A” savings accounts, for instance, is going to cost near 3 billion to their holders. That must be added to all the pressures on purchasing power which are accumulating on household and which are at the origin of the major political crisis France is going through.

That practice, consisting in basing budget forecasts on an artificially overvalued evolution of interest rates, and which are close to a manipulation, is catching up with a public debt management policy which leads to the same result: the accumulation of issuance premiums. In issuing bonds carrying interest rates above the market ones, the State is getting in the capital gain which subscribers pay to it as a counterpart of the abnormally high interest rates they will receive all along the duration of the bond. So, in August 2018, the State has issued, for an amount of 3 billion, a bond with a ten years maturity and a 5.50% interest rate.  Subscribers have paid these securities 149% of their facial value and the State cashed near 1.5 billion. Two issuances, based on the same principle, launched last November have brought as a total 1.8 billion. A similar operation with less important amounts is announced during this week, with the issuance of a bond carrying 3.5% and a five years duration. The rate offered by the market for this maturity is 0.2%. As a total, for the year 2018, the amount of these premiums will overpass 10 billion. The State is reviving with a practice which increases future budget charges and curbs the fall of debt costs which would have happened due to the very low interest rates offered during these last years. Atop of that, the current year deficit is not reduced since the cashed premiums are included in the State cash accounts which are not taken into account for the deficit calculus. The State is even a loser for another reason because, according to European Central Bank decisions, during the full year, it benefits from negative short-term interest rates, between -0.5 and -0.7%. In reducing its cash needs, the State deprived itself of almost one billion, representing what subscribers of these short-term Treasury bonds would have paid him thanks to these negative interest rates.

Cour des Comptes, at the end of 2016, had denounced these practices which reached records levels in 2015 and 2016 and, following that, they had been reduced in 2017. 2018 indicates a reversal. Future debt charge will diminish much less than it should have been, but Brussels will be satisfied because the primary deficit, due to these accounting manipulations which consist in increasing the amount of interests paid during a year, will be improved. Will, according to that situation, French public finance situation be improved? Of course not. The most surprising is that these practices are completely unnoticed and the Parliament, whose constitutional mission is to guaranty the public accounts sincerity, doesn’t care a lot.        



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