Invalidating Minister of Finance past forecasts, interest rate France pays for its 10 years bonds stabilized at the end of this year around 0,8%, a historically low level. That will have significant consequences on public debt cost in 2016, which should fall under 40 billions euros, instead of the 43;5 billions which are mentioned in the 2016 finance bill, still under discussion at the parliament. Senator Serge Dassault report permits us to have are a better understanding of the ways under which this debt is managed, but also provides us with needlessly pessimistic forecasts of the evolution of its cost.
As France has issued with fixed interest rates for all maturities above one year, the cost, for next year is known: 39.5 billions, 4 billions less than in the bill. To these numbers, must be added the cost of short term paper, also issued with fixed interest rate (BTF). But due to ECB policy, which will not change before at least September 2016, and which could even go further after December 3rd meeting, France benefited, since the beginning of this year with negative interest rates (-0.35% at the last short term emission). And this will continue in 2016.
Dassault report gives, for the first time an official evaluation of the amount the State will have collected in 2015 thanks to these negative rates: 276 millions euros. But, for next year, its evaluation shows a charge of more than 400 millions, short-term interest rates coming back to positive territory, in contradiction with well-known ECB decisions. Imagine a return to a 1.6% inflation rate next year is also very hazardous. To forecast, as an average for 2016, 10-year bonds rate above 2% is even more hazardous and would suppose to reach 2,5% for the end of that year, due to the current level. That could occur only in case of a sudden loss of confidence of financial markets. Is it what Bercy is expecting and what are the measures it has prepared to cope with such an eventuality?
The other eventuality is that interest rise and the revival of inflation at a level close to 2% would be the result of a strong rebound of French growth. But, in that case, why be so alarmed and why, in a different chapter of the report, publish forecasts until 2025 without taking into account the reduction of public deficits which would result from this rebound? Needlessly pessimistic and not very rigorous, the Dassault report gives, for the first time, precise information about the crucial question of the” issuance premiums”, frequently mentioned here. These premiums are the consequences of prices paid by the investors above nominal value of the bounds as a compensation of interest rates offered at a higher level than market current rates. For instance, on November 5th , France issued bonds with a facial interest rate of 3.5% for a total of 2.33 billions euros. Investors paid a premium of 25% and the State received 2,918 billions, including a premium of 585 millions. This practice, which had little economic consequences until 2014, has acquired a very different importance in 2015 with the fall of interest rates. The amount of premiums cashed by the State since the beginning of the year has surpassed 17 billions euros. Agence France Trésor, which manages France public debt, justifies it in explaining it favors market liquidity of previous emissions. But, in counterpart of these premiums, the cost of the debt is artificially augmented for the following years, which will increase public deficits in the future.
But these 17 billions represent 0.8% of France GDP, exactly the gap with these famous 3% that Maastricht Treaty fixes as a ceiling for public deficit that France cannot respect. It is surprising that nobody noticed that and had thought to include these premiums in the calculation of the deficit, as, for instance, the sale of shares of state-own companies. The Dassault report provides also information about how this godsend is utilized: it contributes, for most of its amount, to reduce short term financing. But the same report has explained that, due to negative interest rates, BTF emissions, instead of generating a cost, were, for now, providing additional resources. So the State renounces to it. It looks absurd, isn’t?
A better optimization of issuance policy which also takes into account deficit reduction targets, would be welcomed.