It is now a common place. In order to stigmatize the increase of the public debt, we rise the point that policies, conducted in France both by the right and the left, carry a threat for our children. Following this argument, time will come when we will need to reimburse and that will weigh down on next generation shoulders. It would be unfair since this debt is the result of excessive expenditures benefiting to today adults who get rid of it in transferring the bill to their descendants. To put it in other terms, we live above our resources and we expect our children will pay for it. This message has all the appearances of intellectual rigor and arouses emotion in pushing forward the selfishness and the unfair character of such behaviors. But it is misleading because it ignores the way financial markets operates and, above that, it put a mask on the real issues it is necessary to rise about the public debt management in France.
The mistake lies on the idea that states have to reimburse their debts. It is wrong, except in the case of a default. France is not in this situation and won't be in it in a foreseeable future. States don’t reimburse their debt because they refinance it each time a bond reach maturity. Then, they issue a new one. Its interest rate depends of general market conditions and of the opinion passed on the strength of the country. The spread with Germany, which is less indebted but which has a worrying demographic profile, is at a historic low, less than 20 basis points. France inspires trust and will not default because its nationals have a financial saving rate among the highest in the world. The size of the assets located in life insurance programs, which are mainly constituted with state bonds, is close to France net public debt. Atop of that must be added different categories of deposits, in saving and loans institutions for example. Total amount of net financial assets detained by French households are above 3600 billion. And if, instead of measuring public debt in comparing it to GDP, the ratio was calculated against net financial assets or against net total assets, it would be noticed that it has little changed for twenty years. It is stable with a ratio of 16% against total wealth and on a slight rise against financial assets, from 35 to 40%.
Regarding our children, they are not the victims of this system, as it is said but, in France, the main benefactors. The first public expenditures item, education, is dedicated to them. It is not the case everywhere. You just have to compare French registration fees for universities with the 10 000 pounds or the 40 000 dollars British or American students have to pay to be admitted in a university. They are the victims of the system since they had to get a loan to study. In the U.S., the total amount of their debt reached 1300 billion dollars. Regarding our children, they will also inherit the wealth accumulated by their parents and they will not have any problem, with their own savings to continue, in their turn, to subscribe to bonds the state will issue to reimburse those having reached maturity. There is enough disequilibrium between generations, notably regarding employment, the ability to get a home and more generally precariousness not to add to the debate a problem which does not exist and which diverts attention from the errors, much more worrying, done, by the government in the management of the public debt.
Monetary policy put in application by ECB to fulfill its mandate as our country financial strength allows us to take advantage to near-zero interest rates for medium and long-term bonds and even negative ones for issuances with a maturity inferior to seven years. ECB objective is, of course, to support economic activity in offering to companies and households through a reduction of their borrowing costs, a better environment for their investments. But the same argument should be even more valid for the state. Yet, with a general indifference, minister of finance is doing all it can do to neutralize the positive effects of the interest rates fall for itself. It proposes bonds carrying much higher rates than market ones subscribers buy with high issues premiums which have brought in, in 2015, 15 billion euro. But these resources will become a charge, there are no miracles, in the cost of debt in the future and, so, it will increase the deficits of the coming years. This questionable practice, criticized by official Accounting Body, was carried on in 2016, with already 16 billion euro cashed in. These receipts are not taken into account to calculate the deficit of the year, because they are used to reduce short term issuances used by the state for cash needs. But it is absurd because short term durations carry negative interest rates. They reached, on September 26th an historic low with 13 weeks issuances carrying a record -0.63% rate. So the state deprives itself of the corresponding receipts which are far from being negligible since, in 2016 and 2017, they will represent close to 500 millions.
But there is worse. The state continues to issue indexed debt, no related to French inflation but to eurozone inflation. If, at anytime, other European countries have inflationist crisis, which is definitely less improbable than a France default, the cost of our debt will be increased by the consequences of such a crisis. This week, Agence France Tresor, which manages French public debt, has issued bonds, for an amount of 4 billion euro, when the demand was twice higher, with a 30 year maturity, carrying a 0,1% interest rate, which is, indeed, very low. With such a loan, it is true that we don’t make a gift to our children. It is conceivable to propose such issuances with short maturities, in any case inferior to ten years, or to choose our inflation rate as a basis for the indexation. If we make mistakes, it is logical to assume consequences. But to take such a risk with countries which in the past were confronted with prices slippages is incomprehensible.
And, there is even worse. To reduce its debt, the state is selling shares it owns in companies. But these ones are profitable otherwise there won’t be any buyers. So they pay dividends to their shareholders, including the state. In doing that, the state abandon the resources corresponding to these dividends, which are much higher than the savings it realizes in reducing its debt since the interests it will economize are, by far, inferior to the dividends it has renounced. It loose twice. It is what happened, for instance, with the sale of Safran or Engie shares, in the past.
Policies aimed at reducing public debt, are not, by definition, wrong, of course. What is disputable is the timing. When we are in a growth period with high interest rates, it is totally justified. But it is not the case today. When we are in a stagnation period, with a high unemployment and when interest rates are at their lowest level, it is absurd. Even our children are able to understand that.