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AB 2000 studies

Alain Boublil Blog


French public debt : myths and reality

The level of public debt and its costs for the State budget have been used in France as a scarecrow by politicians for about ten years. These threats were held up when tax increases or expenditures reductions had to be voted. Everything has changed these last days. As a miracle, Bercy has admitted that the cost of the debt was going to fall. It will allow financing the new expenditures or the receipts reductions generated by the measures announced by the President of the Republic in December right in the middle of the “gilets jaunes” crisis. They had been evaluated around nine billion euro. The State has just discovered that it is the amount which is going to be saved for the two coming years due to persistence of very low interest rates, according to European Central Bank announcements.

Until now, the evaluation of the prospective cost of the debt was based on the forecasts published in the public finance program bills. So, in 2014, the ten years bond rate was expected to rise in 2015 from 1.5 to 2.2% to reach 3.2% in 2017. The reality has been quite different. At the end of 2017, the 10 years bond carried a 1.1% rate. The government did it again in the program bill covering the 2018-2022 period voted at the end of 2017. That time interest rates forecasts for the same maturity were 1.85%, 2.6% and even 3.25% at the end of 2018, 2019 and 2020. the future debt costs evaluations were including the mark of these forecasts. These numbers were hugely and deliberately overvalued. The reality will be, of course, quite different. At the end of last year, the 10 years rate fell to 0.70% and it has staid, all along February, between 0.50 and 0.60%. Nobody can seriously imagine that these forecasted levels will be reached.   

But the choice of such hypothesis was carrying a double advantage: it created inside the budget a nest egg. The overvaluation of these forecasted expenditures allowed to yield resources in case of new needs, as it has just been noticed with the recent announcements by Bercy; it also allowed, regarding Brussels, to post a primary balance with a significant diminution because that one is calculated by subtracting from the total deficit the cost of the debt. The more this one is high, with stable total expenditures, the more the primary balance in improving. So, at least at the forecasted stage, France was complying with its commitments. It would be surprising if, inside the Commission, nobody has noticed the maneuver.

The State debt real cost includes two items. There are, first, the interests paid all along a year, to bonds subscribers. The amount is known for each coming year. During 2019, with 37 billion euro, it will show a 3.7 billion reduction compared to 2015. Interest rates diminution has a slow and progressive impact during periods. It materializes itself each time the State reimburses a loan come at maturity and refinances it by a new bond which will cost it much less. This point more than compensates the consequences of the public debt increase generated every year by public deficits.

The second item, which is rarely taught about, regards the consequences of indexation on some loans. When rates were high, the State used to propose to subscribers bonds carrying lower rates but including an indexation clause based on French and even euro zone consumption prices. When the bond was coming at maturity, to the nominal values were added the full inflation consequences during the entire period. Fortunately, no rapid price rise occurred during the last fifteen years but at the end inflation generated a cost. When an indexed bond comes at maturity, to the interest paid for the final year is added the cost of indexation, which increases the debt burden. So, on 2018 July 25th, the State has reimbursed a bond indexed on euro zone inflation and carrying a 0.5% rate. The extra charge has been about 650 million. This year, again on July 25th, the reimbursement of the bond indexed on French inflation and carrying a 1.30% will cost 1.2 billion. But it is nothing compared to what is going to happen on 2020 July 25th when the reimbursement of a bond carrying a 2.25% rate and indexed on euro zone prices will occur. The burden will be above 5 billion, which will write off on one shot all the consequences of the interest rates fall that year.

Curiously, in 2018 and 2019 budget documents, burdens provoked by indexation have been overvalued. So, it is possible that provisions have been constituted to cope with the 2020 shock. But it is unlikely, due to the consequences of indexation, that the fall of the debt burden is high enough to offset the new expenditures announced in December. Yet, it is also possible to ask why France is still using this indexation practice which has, as an effect, to postpone on future fiscal years excessive charges, especially at a time when interest rates are so low. So, on February 21st, the Treasury has issued indexed bonds, the first one on French inflation and the second on euro zone inflation, carrying 2.10% and 1.85% rates with 2023 and 2027 respective maturities. The subscribed amounts, 1.2 billion as a total, were low but the offered rates were high enough to avoid adding an indexation clause. Regarding 4 to 8 years maturities, market rates were then near to zero.

It is there that another disputable practice by the State arises: the collection of issuance premiums. When the proposed interest rate is superior to the market rate, the subscriber accepts to pay the bond at a higher price, a premium he will get back all along the duration of the bond through higher interests. The State is including these premiums as a resource in its treasury account, but not in the calculus of its deficit. But paid interests are, them, included in the following years deficits, which has slowed for  the previous five years the reduction of the burden generated by the interest rates fall. That practice reached such high levels than the Accounting Court was concerned about it. After a pause in 2017, the amount of collected premiums rebounded in 2018. This year, just in February, the State collected 1.2 billion, notably through the issuance on February 7th, of a 10 year bond with a 2.5% rate, when market rate was four times lower.

The measures announced in December, as the cost carried by the indexed bonds coming at maturities in 2019 and 2020 have a much too high cost to be covered by the savings offered by interest rate diminution, as it has been announced. The State is going to draw in its treasury, abounded by issuance premiums, to borrow with artificially high prices, as it has started to do in February and so to transfer on future fiscal years the consequences of its policy. It would be surprising if this kind of artifice stays unnoticed forever.                     


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