According to the latest figures from Agence France Trésor, France issued in the first quarter about 93 billion of 3 months, 6 months and one year treasury bonds at an average negative rate of 0.10%. Therefore, subscribers will pay around 100 million euros of interests to the State this year, if the rates remain at this level until December – and that is almost granted. France also issued 66 billion of medium- and long-term bonds. This represents more than a third of its plan for the year, at an average rate of 0.44%. The average rate in 2014 for the entire State’s marketable debt (1.53 trillion euros) was 2.85%. The real cost of the debt early 2015 is six times lower.
An example will make us aware of the budgetary consequences of falling interest rates. On October 25th 2016, the State will reimburse a loan of $ 29 billion issued at 5%. Each year the State has had to pay 1.5 billion of interests associated with this loan. When the State reimburses this debt, if current rates continue, it would pay 150 million euros per year – which is ten times less than before and will save each year 1.35 billion euros. As the previous loans will be reimbursed and as long as the rates will remain close to zero, the resulting savings will help reduce the burden of public debt from fifteen to twenty billion a year. Hence three questions come up: how long will the rates stay low? Why France does benefit from this situation? And how the entire economy could profit from this exceptional situation?
The answer to the first question is easy : rates will stay low at least until the end of 2016, since this is the deadline set by the ECB for its debt buyback program. Treaties forbidding him to directly buy government bonds, Mario Draghi cleverly circumvented them by buying on the secondary market these sovereign bonds. But in reality, this situation should last much longer for two reasons. First, the deadline set by the ECB is the earliest one and nothing prevents the ECB to keep up with this situation. The US "QE" lasted for over six years, and Japan, which is certainly not an example, has enjoyed near-zero rates for twenty years. In addition, other provisions contribute to the lowering of public debt levels: banking (Basel III) and prudential (Solvency 2 which will come into force at the end of the year) regulations encourage banks and insurance companies to hold government bonds instead of financing real economy – it is absurd but this is the case. Moreover, this regulation is not limited in time. Investors are also confident as they subscribed 3.2 billion of bonds at the last French auction, expiring in 2018 with an interest rate of 0% ...
The second question (why France does benefit from this situation?) is more controversial. We know the argument: this situation is fragile, the debt ratio is excessive and the market’s judgment can change overnight. The strategy of fear in order to fight against deficits has lost much of its credibility: the more the deficits grew the lowest became the rates. Moreover, this strategy ignores the fact that the investors’ judgment is always relative. Compared with other major countries, the solvency of France is at the top of the ladder because of a healthy demographic situation and a financial household saving’s rate among the highest in the world. The combination of these two factors explains, no offense to Cassandra’s that France has and will continue to benefit from favourable financing conditions. It would be better to implement other methods to fight against public deficits, such as reducing the excessive number of elected officials, government agencies and local communities. This would certainly have a better effect on growth than increasing the number of Sundays during which supermarkets are open.
The third question is the most important: how the entire economy could profit from this exceptional situation? The current stagnation results from the fall of investment that is neither compensated by the exports, despite the fall of the euro, nor by household consumption that remains low due to the depressed climate created by the continuing rise in unemployment. Who will invest when there is no customer and while banks are incited to reduce their exposure to companies? Who is going into debt to buy a home when he risks the worst trouble if he looses his job? The government has just found out that investment was the weak point of the French economy. What is the state waiting for to show them the way, either directly or via companies or entities that it controls? Regarding long-term investments, a financing rate almost close to zero is an extraordinary opportunity.
The region of Saint-Nazaire experiences a real industrial revival – which is rare in France. Are we going to procrastinate any longer to develop the airport (Notre Dame des Landes) that would give it the international appeal it lacks? EDF exports its electricity. Why should we limit its production, when any new nuclear plant would increase exports and reduce the trade deficit that affects France’s credibility in Europe? Toulouse would like, among other regional capitals, to be connected to the TGV network. Why do we hesitate? France claims to be a great maritime power due to the extent of its territorial waters. But our ports do not have the infrastructures that would make them attractive and this situation benefits Antwerp, Rotterdam and the Polish and Romanian lorry drivers who travel across our territory to reach Spain and Italy. Giving Le Havre, Boulogne and Bordeaux the equipment they lack would stimulate greatly regional activity. Finally, not finding ways to fund insulation work for social and private housing is appalling. Why do we not allocate the savings resulting from the decline of the debt burden to housing by granting subsidies to insulate buildings that use most energy and cancel the ineffective system of "free loans" to which no one subscribes ?
The free public debt is good news provided we are not in denial – that would lead us to stagnation, just like Japan – and provided we are proactive in the conduct of economic policy and strategic when it comes to funding good investment projects. This is what it takes for the government to regain the confidence of French people. But time is short because the schedule is tight.