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AB 2000 studies

Alain Boublil Blog

 

3.01% : The French 10 years bond rate

According to the last figures published February 17th by Agence France Trésor, the rate of the French 10 years bond has overpassed the 3% level for the first time since the euro crisis. The accommodative policy of the European Central Bank chaired at that time by Mario Draghi to save the States-members currency had generated an interests rates fall concerning all maturities. Inflation went near 0% to the point that the Frankfort institution had adopted as its objective, not anymore to fight against inflation but to the contrary to make it rebounding to reach a level near but under 2%, the implicit target inscribed in its mandate.

Everything has changed with the invasion of Ukraine by Russia and the sanctions decided against Moscow. Fossil fuels prices and especially natural gas ones have known a strong increase. The breakout of the supply chains regarding raw materials as industrial components have provoked a consumption prices rise in the whole Europe going from 6% in France to well above 10% in many other States. From July 2022, the ECB has increased its basic rates which had been negative or nil since 2014, three times by 0.75%  and after by two others 0.50%, sending them between 2.50% and 3.25%.

In the United States, the Federal Reserve, since as early as in March had started a succession of rates increases. Its basic rate went so from 0.25% to 4.50%. The last 50 basic points increase has been interpreted by financial markets as the signal that the restrictive policy was coming to its end. Nothing is less sure because American inflation is still above 5%.

In the same time, the ECB was slowing its purchases of public debts bonds on the financial markets, restricting them to reinvesting the amounts of obligations reimbursed at maturity. During the second half of last year and since the beginning of the year, rates of mid and long- term French State bonds have so also increased to reach 3% at a time when the State indebtedness had strongly increased due to the supporting policies adopted to cope with the sanitary crisis and to the consequences of the war in Ukraine.

Consequences for enterprises and household must not be overestimated because in most of the cases, these ones, to the difference of what is done in several Northern Europe countries, got into debt with fixed rates. The increases will only have effects on the new loans whose rates will remain very inferior to inflation. The weight of financial costs wouldn’t increase a lot in the enterprises. Regarding household, we would have some wait-and-see attitude in the real estate sector as it is noticed in the construction of new homes. The housing starts in 2022 remained under 400 000.

The banking sector is, itself, facing a rate curb more and more flat which affects its margins. The spread between the two and the twenty years rate is near zero. Well, the profitability of the financial institutions comes partly from the ability to finance themself with short-term resources carrying low interest rates to offer loans with a longer maturity and rates significantly higher. This possibility has almost disappeared in 2023.

The State and the public authorities will be confronted with the present and future debt charges growing heavy. Several factors contribute to that increase. There is first the augmentation of the indebtedness caused by the accumulation of budget deficits. But as we have seen it these last years the charge increases much less and sometimes can even decreases if the new bonds interest rates are inferior to the average rate of the accumulated debt in the past. As issues carry fixed rates, when one comes at maturity and is replaced by another one carrying a lower rate, the charge is reduced. Between 2021 and 2022, the charge of the interests of the mid and long-term bonds has fallen from 34.2 to 33.2 billion euros. In 2023, it will be 32.7 billion.

It is not the same regarding the short-term debt and the BTF issues. Until 2022 Summer, the State financed itself with negative or nil rates. Everything has changed with the ECB successive rate increases which have been immediately passed on the BTF rates which have reached 2.5% in December. That explains a part of the total debt charge increase between 2021 and 2022 which went from 38 to 51 billion euros.

The other much more worrying factor of the charge increase in the middle term is the indexation on prices of around 10% of the past emissions. Every year the State pays, at the maturity of the bond, the bill of this indexation which has been more than 5 billion in 2022. But that one is, alternatively, according to the years, indexed on French inflation and, which is more worrying, on the euro zone one which is much higher. If that trend lasts, the cost at maturity will not stop to increase, independently from the interest rates evolution.

The last factor which influences the debt charge is the emission strategy of the Agence France Tresor. When the rates were low, AFT has frequently proposed bonds carrying higher rates than the market ones and has cashed the emission premiums the subscribers accepted to pay as a counterpart of these higher rates. That reduced the State treasury needs without being a source of saving because the short-term rates were then negative or nil. But that increased the amounts of interests to be paid in the future. Since the rates increase AFT, probably to satisfy investors demand, has adopted the opposite policy. It proposes bonds carrying rates inferior to market ones but with a reduction, which has, as a consequence, to require an increased recourse to short-term financings which, then, carry now a high cost. That makes the charges of the exercise heavier. The forecast of a stability in 2023 of the charge of the debt compared to 2022 inscribed in the 2023 Finance bill seems optimistic, despite the exceptional character in 2022 of the taking back by the State of a part of the SNCF debt.

Two factors incite, yet, to soften the alarmist messages frequently delivered by politicians and resumed by the medias. The first one is about the spread with Germany, a country much less indebted than France. It remains around its structural level of 45 basis points. Investors have so kept their trust in the country and continue to subscribe its emissions. The second factor is about the past action of the ECB which is now in possession of near 30% of the French State debt. As this one is its second most important shareholder, it is a little as if the State was lending to itself. But that proportion remains inferior to Nederland (48.5%) and German (43,6%) ones.

The main source of worrying regarding the future evolution of the cost of the debt is so inflation. Prices increase is by large higher than interest rates level. To reduce this risk, it is necessary to lower as possible the volumes of indexed emissions on French prices and even more of these indexed on the euro zone prices.

        

 

          

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