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AB 2000 studies

Alain Boublil Blog


34.5 billion euro : A record for French State emissions of Bonds

Since the beginning of May, the State has issued bonds for a record amount, 34.4 billion, through two Treasury Bonds issues, which brought as a total 21.6 billion carrying a -0.5% negative interest rate and 13.8 billion through mid and long term maturities bonds, an amount to which must be added an emission premium for an amount of 1.4 billion, generated by a 4% 2060 Bond. During the same period in 2019, with the same number of issues, the State got a one and half lower amount, i.e. around 20 billion. The huge expenses generated by the support to enterprises and household to cope with the corona virus outbreak have increased the State needs for new resources and dig the budget deficit. The results of these issues show that today it doesn’t have any difficulties to finance itself.

That increase has not generated an interest rates rise. Regarding Treasury Bonds, it was normal because the ECB has maintained its negative rate and should keep it at least until the end of the year. Regarding mid and long term financing, it is more revealing about the financial markets perception of the French public finance situation and its indebtedness. Obviously, the clearing of the symbolic level of GDP 100% ratio for the public debt hasn’t had any consequence on investor thirst. Since the beginning of the month, Ten years-OAT rate remains stable around 0%. The average weighted mid and long term emissions rate since the beginning or the year calculated by the French Treasury Agency also remained very low: -0.07%. Regarding the spread with the bonds issued by Germany which has a public indebtedness ratio almost twice lower than France, it is fluctuating for six months between 30 and 50 basis points. The sanitary crisis and the deep recession which are affecting European economies have not had, until now, significant consequences on France financing conditions.

The second amended Finance Bill for 2020, which has just been approved by the Parliament gives a new estimation of the State deficit for this year which would rise from initially 93 billion to 185.5 billion. The mid and long term bonds issued in the past which are coming to maturity this year represent 130 billion to which must be added the indexation cost of some ones for an amount of near 6 billion. So, in 2020, the State will have to find on the markets 320 billion euro. These last ten years, a very disputable strategy had been put in place consisting in reducing short-term financing and giving the priority to long term issuances associated with high issuances premiums. France took less profit from very low and even negative rates during these last four years because issuance premiums were abounding its cash. The State, moreover, was slowing the diminution, year after year of the cost of its debt under the effect of bonds carrying rates by far above market ones which were weighting on the following budgets until they came at maturity. Treasury Bonds share had been reduced by half to the point they represented in 2019 less than 6% of all the emissions. So, due to that, the State was even less profiting of negative interest rates.

But that penalizing strategy is abandoned to facilitate the financing of the large increase of the deficit. The State, to do that, intends to dip into the cash generated by past emissions premiums and increase the amount of Treasury Bonds emissions. So, the augmentation of mid and long term emissions, for an amount of 40 billion will cover less than half the State new needs and the risks of a rebound of long-term rates will be reduced because its recourses to the markets will have been limited. The very high increase of emissions in May and their success show that this scenario is credible.

The public debt rapid rise will no more provoke an increase of the debt charges in the coming years because the extra indebtedness is financed by bonds carrying a zero interest rate. Even if we attend tensions on the market, the savings coming from the amortizing of past issuances carrying very high interest rates will by large offset from 2021 the consequences of an eventual rates increase. But that situation is only sustainable if the growth coming back allows returning to a situation where public finances have been stabilized which supposes that the causes of the past deficits have been identified and the cures brought.

That crisis, and the two social ones which have affected France these last two years, show that French people expectations will not be fulfilled and the public deficits will not be reduced through an attack against public services. To the opposite, it is in protecting these ones against an intrusive and an inefficient likewise costly bureaucracy that these results will be obtained. So the lesson of these crisis will have been learnt.   




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