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Alain Boublil Blog


0.30% : French 10 years bond interest rate

On April 18th, the market interest rate for the French debt with a ten year maturity was 0.30%. Since the beginning of the month, it has fluctuated between 0.24% and 0.34% when the yearly inflation rate was above 1%. This exceptionally low level is the consequence, in presence of the slowing of European conjuncture and especially in Germany, of the European Central Bank decision to keep negative short-term interest rates at least until the end of the year and of the favorable appreciation by investors of the France solvability. The spread with the German bond for the ten years maturities is also historically low, between 0.35 and 0.40% when the two countries public finances situation is quite different. France will overpass in 2019 the 3% deficit ratio compared to the GDP when Germany has a surplus above 1%. The noting is the same about the public global indebtedness: France is near 100% of its GDP when Germany is reducing its debt and is approaching the 60% ratio included as a ceiling in the Maastricht treaty. The markets trust in France financial strength can appear as a paradox, at a time when the country is going through a deep and durable social crisis. But investors take also into account figures about French people wealth and their appetite for financial saving which has stricken a record these last months, despite lowering returns due to the low level of interest rates. This behavior is hurting growth through a preference for hoarding against investment but it makes public deficits easier to finance.

The State takes advantage of that and Agence France Tresor has accelerated the rhythm of its bonds issuances. During the four first months of this year, AFT has issued, with especially favorable conditions, an amount of 100 billion euro of medium and long term bonds. For the full year, the amount of the program is 200 billion. These issuances are used to cover the reimbursement of past loans arriving at maturity and to finance the budget deficit of the current year. So, on April 25th, the State will have to reimburse a 29.3 billion euro loan carrying a 4.25% interest. It will pay, for the last time, a charge of 1.25 billion. If we make the hypothesis that it will be replaced by a new bond with the same maturity carrying the market rate, i.e. 0.3%, the saving for each of the ten coming years will be above one billion. That case is not an isolated one and the yearly debt charge will fall along with the amortization of past and costly loans and with its refinancing through new bonds carrying current very favorable conditions.

Unfortunately, the State is dong all what it can do to dissimulate this reality. Bercy has just published its stability program for the next finance bills of the period 2019-2022. It presents its finances forecasts with detailed figures about the level and the charge of the public debt. The program, as the previous ones which revealed themselves deeply wrong, gives its hypothesis about the evolution of the 10 years interest rate. At the end of this year, it would reach 1.25% (against now, it is necessary to remind it, 0.30%)  and then it will increase by 0.75% each year to reach 3.50% at the end of 2022. The program enounces in the same time its macroeconomic scenario, based on a growth rate and an inflation rate inferior to 2% during that period, which is quite inconsistent with the hypothesis regarding interest rates. These last ones are unrealistic not to say fanciful. The U.S. with a low unemployment level and a growth rate and an inflation above 2% for several years have a 10 years interest rate inferior to 3%. Hypothesis about interest rates and the public debt cost are not more consistent with the past and future ECB decisions.

If French and eurozone growth remains so weak, and if inflation is still under 2%, there is no chance ECB starts a monetary policy tightening leading interest rates at the level mentioned in the stability program. For the same reasons, central banks members of the Eurosystem which are the main buyers of the State bonds are not going to adopt a restrictive policy, at least during the considered period. So, the Eurosystem will keep that role. Economic hypothesis formulated by Bercy are not consistent with these ones about the evolution of interest rates which will definitely remain at a low level, in contradiction with what is mentioned in the program. Evaluations which are made about the future charge of the debt are also highly disputable. It is mentioned that, based on the chosen hypothesis, that charge will increase from 37 to 44 billion after three years.

Even if we suppose that a strong rate rise occurs, which, it is necessary to repeat it, is highly unlikely, it carries consequences only the following year. Interests are paid the day of the first anniversary of the issuance. The charge paid in 2022 will only depend from issuances market rates until 2021. But during these following three years, from 2019 until 2021, bonds with a total amount of 210 billion, carrying an average rate superior to 3%, will come at maturity, which will reduce the debt charge in 2022 by 6 billion. To reach the 44 billion, which is mentioned in the stability program for that year, it would be necessary that the impact of the rates increase, we already saw it was unlikely, reach 13 billion, just for that year. It is impossible.

The truth, it is that, like previous programs, based on quite also unrealistic interest rises, and which did not manifest themselves, the State, through this bias, is creating a nest egg to cope with unforeseen expenses. It also tries to create a pressure on public opinion through the presentation of alarmist figures regarding excessive indebtedness, its cost and the risks which it is carrying to make unpopular decisions adopted. But it is not all. This presentation incites also the State to make mistakes in the management of its assets, especially through the sale of enterprises shares. The dividends they pay to it are frequently ten times higher than the savings these sales are supposed to permit through a reduction of the State indebtedness.

They deprive it of essential intervention tools when threats about the concerned companies future and employment are in question. At the end, when public debt is wrongly managed, when nobody knows or wants to take advantage from the favorable consequences offered by ECB monetary policy, everybody is a loser.        


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