Not yet registered for the newsletter service?

Registration

Login

Forgot password? Reset it!

×

AB 2000 studies

Alain Boublil Blog

 

The psychodrama of the French public deficits

At a time when the new French government is looking for measures to redress the public accounts, the publication of job creation figures in the United States (256,000) well above what was expected (190,000) has caused a rise in long-term interest rates that has had an impact on Europe. With growth and inflation both above 2% and near full employment, since the unemployment rate is close to 4%, the Federal Reserve has little reason to lower its key rates in 2025. Four reductions of 0.25% were previously expected. Only one drop is now likely but in reality nothing is certain.

The European Central Bank is facing a different situation. Unemployment remains high with a rate of 6.3% in the euro zone but inflation is close to 2% with 2.4% in November despite the poor performance of Belgium (+4.4%), the Netherlands (+3.9%) and Germany (+2.8%) which is on the verge of a new recession this year. French growth is expected to approach 1%, which is far from satisfactory. The economic situations are therefore very different between the two continents, but this has not prevented European medium- and long-term interest rates from following the movement initiated in the United States.

The ECB could continue to cut its base rates in 2025 as inflation targets would have to be met to cope with very insufficient growth. But this would cause the euro to fall against the dollar. It had already depreciated by 5% in the last quarter and the decline accelerated after the publication of the employment figures to fall to $1.024 to the euro. There is therefore a real risk that Frankfurt will hesitate to cut rates to protect the euro, to the detriment of growth and government financing conditions.

This was all it took for anxieties and a real psychodrama to resurface in France about public debt and the consequences of an increase in the debt burden. Uncertainty about the government's ability to pass its budget and the extent of deficit reduction has so far caused only a modest increase in the spread between German and French rates from 0.60% to 0.80% on 10-year bonds. The assessment of the financial markets is therefore far from being as alarmist as the remarks made by some politicians and the majority of commentators.

The increase in the debt burden depends on the duration of the loans issued. For Treasury bills with a maturity of less than one year, the consequence is immediate. The ECB's key interest rate hikes in 2022 and 2023 weighed on the state budget by around three billion euros each year. The reductions in the 4th quarter and expected in 2025 will result in savings of between one and two billion.

The consequences of interest rate changes on medium- and long-term securities take much longer to appear. Until 2022, despite the sharp rise in public debt, this burden has increased little because securities issued in the past with high rates and maturing have gradually been replaced by debt bearing very low or even zero rates. This has helped to mitigate the consequences of the increase in public deficits. But this positive effect is fading as there are fewer and fewer expensive maturing loans and rates on new issues have recovered.

In 2024, according to Agence France Trésor, the average interest rate on issues reached 2.91%. But with inflation over the year still close to 2%, the real rate remains very low. But following the Fed's announcements, the ten-year rate on French government securities stood at 3.47% on January 13. Unlike in previous years, we should therefore see a widening of the yield curve with a growing gap between short-term maturities and longer maturities. As we have seen, these movements will reduce the debt burden in the short term but make it more expensive in the medium term.

Despite the high uncertainty surrounding the political situation in France, the markets continue to finance the country's deficits under reasonable conditions. The last issue on January 9 was oversubscribed three times. The State, before the additional auctions, raised 13 billion euros while the demand amounted to nearly 30 billion. The ten-year rate was 3.45%. By way of comparison, the Italian rate is 3.75% and the American and British rates, for the same maturity, are around 4.75%. Two factors explain this confidence in the country's solvency.

First, the public debt ratio of 115% of GDP is nothing extraordinary for a developed country. It is lower of course in Japan, which exceeds 200%, but also in the United States, the United Kingdom and Italy. Only Germany, among the major economies, is doing much better. But is it really a reference, when we see the accelerated ageing due to a very low birth rate for a long time, the low level of military spending and the major energy crisis that is looming for having trusted in Russian coal production and gas imports?

The second factor that reassures the markets and the rating agencies which, despite the catastrophic speeches, continue to give France a very high rating, is the accumulation of household financial savings, which will exceed 6000 billion euros in 2025. Contrary to what is claimed, this public debt is largely held by these households via their life insurance, even if the funds are often located in Luxembourg, or by the ECB which owns more than 20% of the State's debt. There is therefore no serious doubt about the country's solvency, which has been confirmed by the rating agencies.

This is why the debate on the pension reform, which is creating so much tension, is a political psychodrama. It ignores or pretends to ignore the real situation of the pension systems with a structural deficit in the general scheme that clearly needs to be filled and a structural surplus in the supplementary schemes and special schemes whose combined reserves exceed 100 billion euros. It would be enough each year to change the method of distribution of levies to gradually solve the problem 

So, why these alarmist speeches and this political debate that is akin to a psychodrama? For purely tactical reasons related to domestic politics. Rightly or wrongly, political parties want to push through very unpopular reforms such as the one relating to the retirement age at all costs. They are therefore threatening to overthrow the government. They achieved their objective by censuring the Barnier government and France will have had four prime ministers in the space of a year, which is unprecedented.

There is no reason to be sure that sooner or later, the new Bayrou government will not suffer the same fate. France would then be in a situation where, by dint of invoking the possibility of a financial crisis without any real basis, the country would be confronted with a real political crisis that could provoke a real financial crisis due to the loss of credibility of its leaders.