The long-term interest rates increase is going on in France. The 10 years State bond showed September 23rd a 2.49% return. The move is a general one in the Western world and it results from the adoption by the central banks of more restrictive monetary policies in order to fight against inflation. The Federal Reserve has just increased its basis rate by 0.75% for the third time to put it at 3%, which was forecast, and has announced, which was less expected, new significant increases in a near future. Inflation has reached year-on-year 8.3% in August. Bank of England has increased its basis rate to 2.25%. The European Central Bank had also increased its basis rates at the beginning of this month, for the first time, in 10 years. Even spectacular as largely commented these decisions are transferred on mid and long term bonds rates but are still very far to follow the evolution of the inflation.
In France, the prices increase had fluctuated from 2012 to 2022 beginning between 0 and 2%. It has brutally risen since the start of the year to reach near 6%. In this context, during the previous period, the ECB had adopted a monetary policy qualified as “accommodative” to make inflation rate increasing, in accordance with its mandate, to a level inferior but near 2%. It has proceeded to acquisitions on the markets to facilitate the States financing during the pandemic crisis, which has contributed to keep mid and long-term rates at a level fluctuating around 0%
Everything has changed since the inflation comeback, as is testifying the fast rebound observed since the beginning of the year of the rates paid by the State. Without the short term bonds issuances, the average of the bonds rates issued since the beginning of the year was superior at the end of August to 1%. The 10 years bonds issued September 1st carried a 2.21% rate and the rise should accelerate in October, which, in a context of a heavy budget deficit, has generated a lot of alarmist declarations.
To be reinsuring, the State uses, as an indicator, the ratio between the deficit and the GDP, which would remain unchanged in 2023, around 5%. But, in absolute value, the deficit year-on-year will increase at the same rhythm than the GDP and with it the amount of the negociable bonds which will overpass 2 300 billion euros. People then are worrying about the consequences of the indebtedness and of the rates increases on the debt charge. The presentation, utilized for years in the programming finance bills has yet been until now invalidated by the facts.
That charge is falling for ten years because issuances carry fixed rates. Each year, the State reimburses bonds carrying rates by large superior to the rate it pays on the market to finance this reimbursement and the deficit of the current year. The interest charges were above 40 billion ten years ago. In 2022, following the inventory operated by the French Treasury Agency which is in charge of its management, the amount will reach 33.2 billion euros. The computation for 2023 gives 33.5 billion with the indebtedness increase and the appearance of the first payments of the interests of the 2022 second half issuances carrying higher rates. These new charges are hardly compensated by the savings coming from the end of the payments of the interests on the bonds which came at maturity in 2022. So the debt charge is going to increase but not with the brutality which is too frequently mentioned.
The main risk is not there but in the policy which has consisted in issuing indexed bonds on the French inflation or the euro zone one. The cost of this indexation doesn’t appear every year as the interests. It comes at the maturity. The amount of the indexed debt is 45 billion for the French inflation indexed and 130 billion for the euro zone one. So there is a paradox. When France has known better than its partners master the inflation since the beginning of the energy crisis, it will not take profit of that, to the contrary, due to its debt indexation mode.
That strategy had a budgetary objective. Due to the country past inflationist reputation, it was thought that it will be less costly to issue bonds indexed on the euro zone inflation along with perpetuating the idea that France was a less virtuous country than its neighbors. But that strategy is returning itself against its authors because the indexation bill will be increased by that choice. In 2022, the cost of the indexation of the bond came at maturity July 25th has been 4.7 billion euro sending the debt charge in the budget of mid and long-term bonds to 38 billion. In 2023, with the current spiraling out of control of the prices, the indexation on the euro zone charge of the bond coming at maturity on July 25th could overpass 5 billion euro, offsetting the favorable effects of the amortization of past bonds carrying high interest rates. The total debt charge in 2023 would remain near the level reached in 2022 but it will be the last time.
Worries about inflation are justified because it is there that lays the main risk regarding public debt. In order to reduce its exposure to the inflationist risk, the State would have a full interest to reduce its issuances indexed on the euro zone inflation and to use its cash coming from its short-term issuances which still carry very low rates to buy back on the market these indexed bonds.