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Voting polls: where do we stand?
The public debt is a topic that relatively little animates the debates of the French presidential campaign. It must be said that in a campaign, candidates always prefer to talk about stimulus rather than restriction measures. Yet the programs do not evade the subject. "Not to reduce our current spending and our debt would be irresponsible (...);Not to invest for the future would be just as much, " says Emmanuel Macron regularly. The doctrine of candidate François Fillon is summarized in one sentence on his website: "I will not let my country go bankrupt! ". Jean-Luc Mélenchon and Marine Le Pen plan to reduce the debt-to-GDP ratio respectively by 12 and 8 points, envisaged not by austerity measures, but by measures of stimulus (investments, increase of the SMIC (minimum wage) for Jean-Luc Mélenchon, these same measures to which should be added the fight against social fraud and tax evasion in the case of Marine Le Pen. Benoît Hamon, for his part, once adopted a rather radical attitude, evoking (on February 27) the idea that France would not repay its debt ... an attitude abandoned since. In short, if the public debt is not at the heart of the debates, it is never far from it, in reality.
This article aims at presenting what is at stake for the French public debt. It provides a basis for comparison with other European countries (notably Germany) and discusses the role of the ECB, and the importance of budgetary discipline. It also shows the quality of the French public debt: well rated by the rating agencies, much more liquid than that of its European counterparts, the French debt has many advantages which deserve to be highlighted during this election period.
I – A stabilising debt-to-GDP ratio
Let us first recall that the public debt represents all the borrowings contracted by the public administrations. It thus represents the State's debt (about 80% of the total), as well as those of local and regional authorities (about 10%) and of social security organizations (around 10%). The public debt is the total amount borrowed by these three sub-sectors.
Alike those of the other European countries, the French public debt climbed after the 2008-2009 recession, due to declining tax revenues and increased social spending. After accelerating quickly over the 2008-2010 period, the debt-to-GDP ratio continued to grow, at a slower pace, over the 2011-2014 period, moving toward stabilisation from 2015 onward, at levels close to 100%. France's debt-to-GDP ratio is close to Spain's, clearly above Germany's, and clearly below Italy's. In absolute terms, the size of public debt for Germany, France, and Italy is more or less equivalent at around €2.1-2.2 trillion, while Spain's public debt is only about half that amount.
The increase in the debt-to-GDP ratio in recent years is essentially the result of regular primary deficits, which France has been struggling to get rid of for several decades (the last budget surplus dates back to 1974).Since 1980, the primary balance has been positive only seven years out of 37 (public revenues higher than public spending, ex interest expenses). The primary deficit topped out in 2009 close to 5% of GDP before being reabsorbed slowly over the years, but it is still close to 1.5% of GDP (Germany and Italy have a primary surplus of about 1.5% of GDP).
Above all, it is the sharp decline in long-term interest rates that has blocked the rise in French public debt. While the French 10 y. yield averaged 4.40% over the 1999-2008 period (fluctuating between 3 and 6%), it then fell virtually continuously due to worsening growth forecasts, anticipations of actions by the ECB, rate cuts and then unconventional monetary policy measures themselves. The French 10 y. yield reached an all-time low at the end of September 2016 at 0.10% before rising back up to around 1%. Consequently, the difference between the average interest rate paid on the public debt and nominal GDP growth became negative and is currently contributing negatively to the trend in the debt-to-GDP ratio.
A clear divergence with Germany. It should be noted that France's public finance situation has gradually moved away from Germany's and is now closer to Spain's. While the debt-to-GDP ratios of Germany and France were extremely close until 2010 (around 80%), they diverged quite plainly after that (down in Germany slightly below 70%, up in France to just under 100%), because of the divergence in the primary balances. This justifies the existence of a higher credit risk premium in France than before the 2008-2009 Great Recession. We will address this topic in an upcoming publication.
II - Still a high-quality signature
With the Eurozone crisis and the near-universal rise in the debt-to-GDP ratio, virtually all countries saw their credit rating downgraded. Germany, the Netherlands, and Luxembourg are the only three countries in the Eurozone to have held onto their AAA rating with the top three rating agencies (S&P, Moody's, and Fitch). Even though it has been chipped away since the Eurozone crisis began, France's average rating is now AA, which is one of the best ratings in the world. For example, the United Kingdom's average rating is very close to AA.
Within the Eurozone, in terms of credit rating, France appears much closer to the "core" countries
(Germany, The Netherlands, Austria, Finland) than the "peripheral" countries (Italy, Spain, and Portugal).
Where does French public debt stand compared to those of all the other developed countries?
A relevant metric for measuring the capacity of a population to repay its public debt is public debt per capita. In 2016, this ratio was €32,400 in France, compared to €25,800 in Germany and €36,400 in Italy. Public debt per capita in France is fairly similar to the United Kingdom's but much lower than the United States' ($62,000) or Japan's ($85,000).
III – The ECB's purchases have a strong impact on the supply/demand balance of French government bonds
For many years, France has been in a net positive issuance position due to recurring budget deficits. ECB statistics show that net issuance of long-dated government debt securities totalled €68 bn in 2016 (€251 bn in gross issuance).
Since March 2015, the Eurosystem has entered into a large-scale asset-buying programme. The main component of this programme, the PSPP ("Public Sector Purchase Programme"), is focused on sovereign bonds. These purchases have weighed very heavily on supply/demand balance and brought strong downward pressure to bear on European long-term yields in general, and on French ones in particular. In 2016 alone, the Eurosystem purchased €149 bn in French government debt securities, which is more than twice the amount of net issuance.Thus, Eurosystem purchases more than offsets net issuance.
The drop in interest rates and the Eurosystem's purchases themselves have allowed European governments to extend the maturity on their public debt. For France, the average maturity rose to 7.1 years (ECB figures), which is significantly higher than Germany's 5.8 years.
The ECB's QE significantly changed the holding structure of French government bonds
One of the consequences of the decline in long-term rates after the ECB's unconventional monetary policy measures was the reduced exposure of non-residents to euro public debt. The share of euro public debt held by non-residents has eroded over the past ten years. In France's case, this proportion has been eroding, though slowly, over the years since 2009. As a side note, holdings by non-residents are quite a bit more substantial for short-maturity securities.However, the share of non-residents holdings is still much higher in France (around 60%) than in the other three large Eurozone countries (about 50% in Germany, 43% in Spain, and 33% in Italy).
In addition, French insurance companies hold about 20% of French government bonds, and French banks hold a little under 10%, while debt securities bought by the Eurosystem under the PSPP (€269 bn in late February 2017) come to about 15% of the total amount of French public debt securities. This percentage should slightly exceed 20% at the end of 2017. The Eurosystem has essentially purchased French bonds from French banks and non-residents.
The Eurosystem's presence on the European bond market in general and on the French market in particular is long-standing because the securities held to maturity will be reinvested in newly issued bonds by the Eurosystem for an extended period. As of today (end of March 2017), the Fed has still not started to reduce its holdings in US Treasuries, while it ended its purchasing programmes in 2014, and the ECB will purchase €60 bn per month until at least December of 2017.
As regards the French public debt, it should also be recalled that there is a strong captive demand from French institutional investors, who rightly think that this asset can be considered a risk-free asset. This is all the more true as the number of risk-free and good liquidity assets has considerably reduced in the world, following the Great Recession and the Great Financial Crisis. The ECB is not the only institution to look for French debt.
The subject of public debt regularly comes up in French and European political life. It is clear that public debt has increased significantly in France over the last decade, due to recurring primary deficits, but it is important to point out that:
- France's debt-to-GDP ratio is stabilising, slightly under the threshold of 100%. This stabilisation was made possible by a slight decline in the primary deficit, but mostly by a dive in interest rates due to the ECB's very accommodating monetary policy.
- French public debt is still some of the safest in the world, with an average AA rating from the rating agencies. Public debt per capita is slightly lower in France than in the United States, for example, and comparable to that of the United Kingdom.
In the future, one of Europe's major issues will be the increasing divergence in the public debt trajectory between France and Germany.