In France, for the first time this year, if we except a short period during Summer, the 10 years State Bond went back on December 3rd into negative territory : -0.03%. So, against the forecasts stated many times by the economists and despite the spectacular increase of the public indebtedness since the beginning of the sanitary crisis, France financing conditions remain extremely favorable. But it is not an exception in Europe. Germany keeps its 30 to 40 basis points spread with Paris and has issued these last days 10 years bonds carrying a -0.39% rate. In the Unites States, the rate is stable around 1.4% despite the frequently contradictory declarations of the monetary authorities.
That trend is all the more important than it has been registered in all developed countries a significant inflation rebound. It has over passed 4% in Germany and 6% in the U.S. and it is by large over the 2% threshold in the euro zone. Logically and despite the central banks policies consisting in buying on financial markets State bonds, investors would have been more demanding and get higher rates. But the need to own safe assets, notably to comply with prudential rules, has been more important than the consequences of the depreciation of the assets real value to which they were exposed.
The inflation comeback, after several decades of price stability, has been provoked by the high rise of the fossil fuels prices, which is maybe a temporary one and by the disorganization of the enterprises international supply chains in industrial components which has created penuries. These trends have been amplified by the comeback to the usual VAT rate in Germany which had been lowered to support consumption and by the low tax rates on fuels in the U.S. which makes prices much more sensitive than in Europe to market fluctuations. If, due to the basis effect, these two factors are going disappear, lasting or not character of this inflation rebound is splitting observers, ones believing it is temporary and only linked to the exit of the recession provoked by the pandemic and the others considering that the important costs generated by the environmental transition will weight for a long time on the prices offered to consumers and to enterprises.
What is sure, it is that against the classical economic theories, it is not the very important increase of the monetary creation which is its cause. That one, to the contrary, has had a deciding impact on financial and real estate assets prices. Values are by large higher than these observed before the sanitary crisis when production has a lot of difficulties in many countries to recover that level. In France the CAC 40 index at the end of November was 18% higher than two years ago when GDP at the end of this year will be only near the level reached in 2019.
The comeback, in France, of interest rates in negative territory leads to a reduction of the debt cost all the more lasting that the State has succeeded in extending its maturity. To the opposite, inflation increases the reimbursement charges of indexed bonds about which we can ask ourselves why the Treasury is persisting in issuing them. The public indebtedness went from 60% of the GDP in 2000 to 85% in 2010 and to near 115% forecast in 2021, according to the method included in the Maastricht Treaty. If we consider the net debt, after subtracting the value of the public assets, the ratio falls to 103%. But during that period, due to the very low interest rates and the reimbursement of the bonds come at maturity and refinanced by bonds carrying very low or even negative rates, the debt charge for the State budget came from 2% of the GDP in 2010 to 1.4% in 2020.
Since the beginning of the year, French bonds issuances have known a very big success to the point that their amount in December, near five billion for the mid and long term ones, has been strongly reduced compared to the monthly volume during the previous quarter of this category of bonds which was 22 billion. As that had been done during August, some issuances have been proposed with rates largely above market ones, 4.50% and 3.75% respectively for the 2041 and 2045 maturities, which has allowed the State to cashing near 2 billion of issuance premiums which will go into its treasury. As a counterpart, the State will have to pay during the full duration of these bonds much too high interest rates.
So, the France indebtedness level is not considered as alarming by the financial markets for at least three reasons. The first one is that this debt is, for an important share, some are saying that it could reach 20% of the total, detained by the European Central Bank, so indirectly by the State through the Banque de France. So, it is money the State lends to itself. The second reason is about the measure instrument, the ratio between the debt and the GDP. This indicator is disputable because it is not possible to compare an asset, the debt, with a flow, the yearly production of a country. It would be better to compare to the GDP the amount of paid interests and we have seen that this ratio, for ten years, despite the strong increase of the indebtedness, is in a clear diminution. The interest fall has more than offset the consequences of the accumulation of the deficits.
The third and maybe the most important reason is related to the household financial saving rate. Between 2000 and 2020, it has little fluctuated around 5% of the gross available revenue. Since the beginning of the sanitary crisis, it has more than doubled to overpass 12% as an average. So household have accumulated several hundreds of billion euro on their banking or saving accounts or on their life insurance contracts. The usually utilized argument to denounce the excessive public indebtedness, i.e. that this one will be passed on to the next generations, makes no sense because if it will be legated to the next generations, they will also inherit the money to reimburse it.
The keeping of very low and even negative interest rates at a time when inflation overpasses 2% is also good news for the public finances. Prices increase profits to VAT receipts and it makes mechanically falling the ratio between the debt level and GDP which, if it was needed, leads to reinsure financial markets. What is at stakes is not the indebtedness. What matters is what is done with public money and the indispensable distinction between three kinds of expenses: the pure wasting as for instance the abandoned ministers offices and the hospitals which have been closed, the bureaucratic drifts with the superposition of local authorities and the multiplication of any kind of public organisms, on one side not to be confused with the indispensables expenditures to the good functioning of public services.
The management of the public finances will constitute an important issue in the next presidential campaign. So the credibility of the candidates in this area will depend from their ability to reduce the two first kinds of expenses to finance the indispensable improvement of the public services.