The 10-years French Bond was on November 14th at -0.02%. During the whole summer, it had fluctuated between -0.30% and -0.05%. Since the beginning of November, it is oscillating around 0%. The State is taking a double profit of this situation: it freely indebts itself and it reimburses its debts more easily. Until summer, most of economists were expecting an interest rates rebound. That eventuality was put forward by public leaders to worry and make unpopular measures being accepted. The 10-years rate forecasted for the end of 2019 which was inscribed in the finance law published in autumn 2018 was 2.15%! After this year holydays, it is another threat which was brandished. The upholding of so low long-term rates would indicate that France and the euro-zone were entering into a secular stagnation period. Some even went to pretend that these negative rates were a signal announcing a recession or even a new financial crisis. These diagnostic mistakes wouldn’t carry consequences if they had not as an effect, through un-appropriated decisions, provoked unsuitable economic policies.
The interest rates low level is first resulting from the European Central Bank action. Through fixing negative short-term rates and buying on the market, for several years, bonds carrying all maturities, it has contributed to reduce the interest rates paid by the major public issuers and to make the rate curb more and more flat. New buys had been interrupted last year but the ECB gave to itself the right to reinvest the cash from bonds coming at maturity. Due to the amount of assets in its possession, it was a method to pursue, without saying it, its past policy. This policy has been reinitiated, but at a more limited scale, since November beginning because the target of getting back the inflation rate under but near 2% has not been reached. So, the European monetary policy will contribute to keep interest rates at their current very low level at least until the end of next year.
But the ECB is not the sole responsible of this unprecedented situation. It is also the financial saving surplus in the whole euro-zone which contributes to maintain rates at such a low level. In France, as in Germany, household, due to their worries about the future and enterprises coping with a slowing demand partly due to the international tensions, are feeling themselves little motivated to invest. In France, house building is declining and enterprises self-financing rate has over passed 100%. When there are more creditors than borrowers, it is not surprising that rates stay at such a low level.
There is also, at last, regarding France, a phenomenon, which people beware themselves to comment, investors trust. The spread between French and German 10-years bonds is, with 30 basis points, at its lowest level. Germany, yet, has a high public finances surplus and continuously reduces its public indebtedness ratio when France is denounced as the euro-zone bad pupil with a public indebtedness ratio which is near 100% and a public deficit it cannot keep under 3%. As the ECB is not the only buyer of French bonds, it must be recognized that the risks its indebtedness weights on the country are not dissuading investors.
Until now, the main beneficiary of that policy has been the State. The amount of paid interest rates is falling every year by one billion euro. But this reduction could be more significant if the debt was better managed. Through frequent issuances carrying rates largely above market ones, the State is pocketing the premiums subscribers are paying but it will have to pay artificially high interest all along the duration of these bonds, which slows the reduction of the debt charge all along these years. This practice had been criticized by the National Accounting Court in 2016 and it had been reduced during the two following years. It has strongly rebounded in 2019 when a premiums record would be registered. Since the beginning of the year, and there are still two issuances to come, the amount of cashed premiums is near 20 billion euro. This figure is to be compared with the epic battles between ministers and Bercy when the purpose is to find some hundreds of millions to improve the situation of hospital workers or the isolation of homes.
The premiums can also be used to cover the costs resulting from the indexation of some loans. In July, the State has reimbursed a 10 billion bond to which is added an extra indexation charge of one billion. To the difference of paid interest which are included in the State budget, that charge has been financed by the re-utilization of a part of the issuance premiums. That practice will find in 2020 a spectacular application when it will be necessary to reimburse, this time, more than five billion in July. The State will draw on again in the treasury surplus generated by these premiums. We could also, then, question the opportunity to offer to the market France or euro-zone inflation indexed bonds. In the past, that allowed to issue with significantly lower rates. Today, this advantage has mainly disappeared because the spread between indexed bonds rates and the others is very low.
The results of this policy for the other economic agents are controversial. Banks profitability is affected by the disappearance of the spread between the cost of their resources and the remuneration of the loans they offer to their clients. It is why they more and more move toward merchant banking and wealth management. On the household side, the trend is in favor of an accumulation of deposits and of hoarding. They are not dissuaded by the near zero remuneration they are offered. With the lack of growth prospects, confirmed by the last published figures in France as in Germany, enterprises are little tempted to proceed to productive investments and they use their financial resources to pay their shareholders and to make acquisitions. In all these situations, the upholding of so low interest rates favors financial activities and we find there the explication of what could appear as a paradox, the record high level of stocks markets at a time when growth is so low.
The interest rate level will stay at a very low level. Such a financial environment is creating a new context and the economic policy must take it into account. The demand stimulation through public expenditures is not useless and it is why European criteria must be adapted to this new world. But it will not be enough. To incite economic agents to change their prudent attitudes and even of excessive hoarding, we must cheer them. Unfortunately, it is the opposite which is happening in France where public action gives rise to anxiety and massive social movements.