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AB 2000 studies

Alain Boublil Blog


The daily figure: 1.34% for the TEC 10

The rate recorded on the financial markets for French 10-year bonds reached 1.34% on june 11th, which is a rapid return to its 2014 average level. Indeed it was still below 0.5 % early May. Why such brutal fluctuations and what are the consequences for the French economy?

Until a few days ago, the word that was on everyone's lips and that triggered the concerns of economists was "deflation". Falling commodity prices under the combined effect of lower Chinese imports and the sharp rise in US oil production, was passed on to consumer prices, which also fell. This has not happened in Europe for decades. The spectre of the "lost Japanese decade" was on everyone's mind. We feared this perverse cycle caused by the behaviour of economic agents that differed spending as they wait for a discount, and which results in a vicious cycle. Production, hence employment, is adjusting downward. This threat was even more important since the said States - because of their excessive deficits and their debt just as excessive in the light of European commitments - can no longer adjust their budget to stimulate activity. The only recourse left was the ECB. Its president, Mario Draghi, did not spare its efforts to counteract the deflationary trends, which, let us note in passing, is an extraordinary reversal of history. One recalls that the mission assigned to the ECB, after laborious negotiations between European countries in 1992 was the fight against inflation, not the reverse.

The lower short-term interest rates and the massive purchase program of government bonds, led the long-term rates reaching unprecedented levels in early May. Investors anticipating negative inflation rates in the coming years, which are characteristics of deflationary risk, were happy with very low positive rates. Everything has changed for a month. Oil prices stopped falling and started to rise again. One has also noticed the first signs of a recovery in Europe. The threat of a Japanese-style scenario walked away, though these signs remain fragile, notably in France, as evidenced by the continuing rise in unemployment and the decline in industrial production in April.

The statements by Mario Draghi, noting the obvious, namely the reduction in the risk of deflation, have amplified movements in the rates. The recovery was as brutal and excessive than the drop that occurred last fall. In this new context, investors have conducted arbitrations in favour of more profitable investments, especially concerning pension funds, as their pension commitments were no longer tenable with near-zero rates.

Immediately, there has been a shower of alarmist comments on the consequences of rising interest rates for France. Rare were those comments describing the beneficial effects of the decline. To measure the impact of this rise, we must integrate two factors: the loans are issued at fixed rates and their average duration (specialists call it maturity) exceeds 7 years. They are mostly used to repay old loans issued at rates three to four times higher. Thus, since the beginning of June, France has placed 20 billion euros on the market. Half of it is made of short-term bonds with negative rates reaching -0.2%, and the other half is made of long-term bonds (8-15 years), with an average rate of 1.2%.

 Since the beginning of the year, the weighted average rate of emissions above two years was   0.51% (excluding indexed bonds). In 2013, the rate was 1.54% and in 2011, 2.8%. The decrease in the charge of the French public debt will therefore continue, simply because high rates have been replaced by new low emission rates, although these rates are higher than the very low levels observed in April and in May.

One can notice this decline in the latest monthly statement of the state budget: the burden of debt at the end of April fell by 5% to 17.4 billion. France Treasury Agency expects a total charge for the year of about $ 40 billion, meaning 3.4 billion less than what was initially budgeted. This charge should be stabilized in 2016 thanks to successful issuances and should not undergo a sharp increase as announced in the Public Finance Planning Act. It will even be the most important "budgetary savings" entry promised by the government for years to come.



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