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AB 2000 studies

Alain Boublil Blog


Debts : The end of the great fears

The massive measures to support economy after the corona virus outbreak will generate an increase of the country global indebtedness. If household, due to the constitution of  precautionary savings and to a slowing of their real estate investment, are few affected, it is not the same regarding enterprises and even regarding the State and the public administrations. With the sanitary crisis, and the measures adopted everywhere in the world to cope with it, we saw, due to that, a paradigms reversal. Before, the debts level was denounced as excessive but the threats were by large exaggerated. With the crisis, a 180° turnaround has been operated. Enterprises have been less affected as it is said but this turnaround has been spectacular regarding the public sector.

At the end of 2018, the last published numbers, French companies were by large more indebted that their competitors, notably in Europe and in the U.S., to the notable exception of Japan. It was mainly the consequence of their past foreign acquisitions they have financed through borrowing. For instance, France Telecom, today Orange, GDF-Suez, today Engie and even EDF had tried to offset their likely market shares losses on their local market caused by the opening to competition. These acquisitions have been far from giving an answer to their expectations and they revealed themselves costly. The financing techniques inside groups, frequently for fiscal optimization have also increased that indebtedness. At the end of 2018, according to INSEE figures, the non-financial enterprises net assets represented 2277 billion euro, after the deduction of a 2277 billion euro net debt. With the financial markets rise in 2019, their net value strongly increased and their indebtedness did not show, as a whole, a significant risk, especially since financial conditions were remaining highly favorable.

The brutal stoppage of the activity during three months and the foreseeable slowness of the economic rebound will now heavily weight on their financial situation. Fixed costs will have to be covered without receipts are there and a massive recourse to credit is unavoidable. This one will be made easier by the State decisions consisting in bringing guarantees which will profit to the banking system, sure, in case of defaults, to be reimbursed. Enterprise will have to cope to their loans maturities and all of them will not be able to avoid failure. The corona virus crisis will leave those which have survived with a heavier debt but the support of the State will have permitted to limit its consequences and it is on it, at the end, that most of the financial charges will weight on the future.

The quoted amounts seem considerable. Near 500 billion euro has announced the president of the Republic, in reality 460 billion according to the evaluation made by Bercy. For more than half of that, they are warrants which will not be activated. The show-off of such numbers has as an objective to reassure but it is more a matter of communication than of action. Above all, it gives an idea of the magnitude of the reversal of the dominant way of thinking. Yesterday, a couple of billions constituted a threat because they were making public indebtedness heavier. Today, these announced hundreds of billions are there to reinsure.

If abstraction is done of the offered guarantees and of transitory supporting measures, public indebtedness would increase by about 200 billion. So the third amended finance bill forecasts a deficit of 222 billion, a 129 billion increase with regard to the initial finance bill for 2020, due to new expenses (taking part-time unemployment charges, sectorial programs and measures in favor of all these who have been mobilized during the crisis) and to the fall of fiscal receipts caused by the diminution of the consumption during the lockdown which has affected VAT receipts. Must be added to that the estimated deficits of the healthcare system (30 billion) and of the pensions (20 billion) which could be partly covered by their copious reserves (more than 100 billion euro), the special funds have at their disposal.

So the State will have to substantially increase its borrowing and the public debt should reach near 120% of the GDP at the end of the year compared to 99% at the end of 2019. Is it going to meet difficulties and is that will generate an increase of the financial charges? Until now, nothing allows to affirm it. Since the beginning of the year, the strong increase of issuance of Treasury Bonds has easily found investors and 10 years interest rates have remained near 0% with the spread with the German Bund remaining between 30 and 40 basis points. The ECB program, consisting in buying Bonds issued by State-members has contributed to that but it is far from being the only reason. The high level of the household financial saving rate and the confidence of foreign investors about euro-zone have plaid a decisive role.

Financial crisis in the past, the French devaluations in the Eighties, the Asian and the pound crisis in the Nineties and the sub-prime crisis in 2007 have a common point: the foreign deficit of the concerned countries and their need to have recourse to foreign financing. It is not the case today in the euro-zone and regarding France in particular. So it is not surprising if the large increase of the borrowed amounts did not generate an interest rate rise, in taking into account the very low level of inflation. The past causing anxiety message about the risks of an excessive public indebtedness and of its cost for the future generations has leaved the place to a reassuring and quite justified message. It was not necessary to add to the outbreak and to the economic crisis it generated the threat of a financial crisis.

The change of tune has been spectacular inside Bercy. Instead of multiplying the alarmist forecasts about the future charges generated by the debt to make a pressure on the State in order to reduce its expenditures and to make accepted unpopular measures, it, at last, has presented the truth, as are testifying of it the last estimations made by Agence France Trésor. Despite the explosion of the deficit, the net debt charge will go between 2018 and 2020 from 41.7 to 36.56 billion. The past Finance Program bills were forecasting for the year 2020 a cost above 50 billion, without, of course having included the possibility of such an economic crisis.

Atop of that, AFT has, at last, introduced a new concept, the “net accrual costs”. It consists in removing in the evaluation of the costs for a year, the supplement of paid interests caused by bonds issued carrying rates above market ones. That practice consisted to increase future charges as a counterpart of the cashing by the state of issuances premiums. The new concept consists in reevaluating the debt cost through the deduction all along the duration of a bond issued with a premium, of that artificial overcharge. The result is spectacular. In accrual costs, the debt charge will be reduced from 35.22 to 28.23 billion between 2018 and 2020. The government will not be confronted, in the near future, to particular difficulties to finance its policy.

In front of the urgency, the State has, at last, admitted it was useless to offer a wrong idea regarding the risks carried by the public indebtedness. But the main challenge is not there. It is important in the crisis period to have at its disposal resources. But it is much more important to use them wisely.        



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