Since the beginning of August, the French State 10 Years-Bonds rate has fluctuated between -0.14% and -0.20%. We must come back to 2020 autumn at the top of the second wave of the Covid-19 pandemic to find so low interest rates. The trend is general in the euro zone and the spread between the countries said “virtuous” and the southern countries has not stopped to narrowing. Between France and Germany, it little oscillates around 35 basis points when the difference between their public indebtedness ratios is huge, with 75% of the GDP for Germany and near 120% in France and 15% in Italy.
Yet, the macroeconomic situation today is quite different. A year ago, the area is going through an unprecedented recession since the war. Today the European economies are rebounding. A growth between 5 and 6% is forecasted for France, 3,5% for Germany and 7% for Italy. There is no prospect of central banks more accommodative policies in the world. To the opposite, in the United States, the number of declarations in favor of the tapering and of the increase of short term interest rates in the context of a durable improvement of the economic situation and of employment, with the creation of 940 000 jobs in July and an unemployment ratio of 5.4%. if in Europe, we are not there, nobody thinks about an increase of the buying of State Bonds by the European Central Bank.
Atop of that, the spectrum of an inflation rebound is more and more present. The economic recovery and the breaking of the industrial products supply chains have generated a price rise of commodities and not only oil and a repercussion to the consumers of the costs increase affecting enterprises. The inflation rate of the euro zone is nearing the 2% level considered when the Maastricht Treaty was elaborated as the level not to exceed. It passed 4% before falling back around 3%, due to the sharp increase of the energy prices and to the coming back of VAT rates to their pre-crisis level.
So the real interest rate paid by the States, when inflation rate is deducted, is even lower than at the highest moment of the crisis, which will not avoid to reduce the public debts charges, to the condition that these ones stop to issue as in France indexed bonds with a rate usually of 0.1%, i.e. a slightly higher rate than of classical bonds. The State does not save anything but it creates a charge when the reimbursement occurs which will be all the more heavy if the current inflation trend continues. Yet it can be asked why the French Treasury persists to issue these bonds every month, even for modest amounts, between one and two billion euro.
The same criticism can be formulated regarding the issuance premiums cashed with bonds issuances at rates above market ones. The practice seemed, at last, on the way of its disappearance since the beginning of the year. But in August, maybe taking profit of the vacations and the lack of attention of the observers, the Treasury has cashed near to two billion euro, notably through the issuance of a bond carrying a 5.75% interest rate with an October 2032 maturity. Subscribers have accepted a price equal to 167% of the nominal value of the bond. So the public debt charge will be increased by the same amount until its reimbursement.
To keep the rates at such a low level has allowed the States to financing the necessary measures in favor of enterprises and household to go through this unprecedented crisis. In France, the exposure of loans guaranteed by the State has reached 140 billion euro. But the role of this accommodative monetary policy regarding the economic rebound has not been, until now, at the expected level. Only two sectors have profited from it, the State, despite practices related to issuance premiums and indexed bonds, and real estate. French public debt charge will continue to be reduced during several years, even if a turnaround, in fact little likely, of the ECB policy would occur because issuances carry fixed interest rates.
The second recipient is the real estate sector. We see a significant increase of the household financings for the acquisitions of homes whose exposure in ten years has increased from 850 to 1400 billion euro. The proposed interest rates for 20 to 30 years maturities lie between 1 and 1.5%, which is also unprecedented. But the consequences on the economy are disappointing because housing starts remain largely inferior to the levels observed in the past. These financings frequently regard existing homes, which generate a pressure on prices, and refinancing operations. Household, thanks to the very low level of the current rates, reimburse past loans carrying much higher rates and renegociate new ones at the current conditions.
The banking sector takes profit of this situation and has just announced for the first half of the year record results. Even if the rate curb is very flat, banks take profit of the massive deposits of their clients and prefer to lend that money at a low rate than having to deposit it at the central bank and to pay a negative interest rate.
To the opposite, we are still waiting the concrete effects of the national and European rebound plans on enterprises investments. These ones are indispensable to recover some economic sovereignty and to launch the country re-industrialization process. In France, industrial production still remains significantly inferior to the pre-crisis level. So the monetary policy with its negative interest rates is still dominant compared to the budgetary policy and Keynes did not really come back.