It is frequently said we must not be guided by fear. But is it a good manner to govern to frighten the people of your country? In a few days, we have just had two declarations of high public officials about the dangers for the public finances the increase of interest rates and inflation represent on the charges generated by the country indebtedness. They included catastrophic numbers without any link with reality. The non-expressed objective was, of course, to make a pressure on the opinion in order to stop to be in favor of wages and social benefits increases to protect purchasing power confronted with the prices rise. At a time when we agree to notice the lack of trust or the rejection of the political class by a large share of the population, which was translated during the last elections by a rise of the extremist parties and a large abstention, are these processes appropriated and have they any chance to be efficient?
Saturday, in the Figaro, the French Central Bank governor affirmed that “each 1% increase of the interest rates would generate in ten years a 1% GDP increase of the interest charge”, which would represent a supplementary cost near 40 billion euro. Unfortunately, this calculus doesn’t make any sense because nobody imagines that the mid and long-term rates will increase every year by 1% to reach 12% in 2032. Atop of that, the reasoning seems to ignore that the Treasury issuances carry fixed rates and that during a long time the State will still profit from the very low rates issuances of these past years, which during the operations of refinancing, replaced past issuances which, them, were carrying much higher rates. The interest charge of the public debt so has not stopped to fall for five years, against the forecasts included in the previous public finances programming bills.
Yesterday, in Les Echos, the Minister of finance was taking again this theme, with lower figures but quite also far from reality. “The interest rates increases and the coming back of inflation generate17 billion extra expenditures of the debt charge as soon as this year”. First observation, since rates are fixed ones, their increase will only have effects next year with the first payments of interests. To the opposite, and this is the second point, the inflation rebound has immediate consequences on the amounts to be reimbursed of the indexed bonds coming at maturity, but definitely not with the proportions announced by the minister.
The French Treasury Agency publishes every month the statistics regarding the State debt which constitutes by far the main part of the public debt. In 2021, the interest charges of the mid and long-term bonds have represented 34.2 billion. In 2022, they will be reduced by 1 billion to 33.2 billion. To the contrary, the consequences of inflation on indexed bonds are real. They were below 1 billion in 2021 but they will reach 4.7 billion in 2022. As a total the increase of the debt charge will mainly result from the indexation of the bonds coming at maturity this year and will represent 3.7 billion. We are very far from the amount of 17 billion which has been announced. What the minister probably wanted to say, it is that if we add on the next nine years to come, a period corresponding of the average duration of the State debt, the consequences of the recent increases, we could reach such a level. But that method which allows to inflate the statistics in order to threat, has no chance to be convincing.
But nevertheless, these presentations have the merit to show, against a very largely shared idea, that inflation is not inevitably good news for public finances when the State issues indexed bonds. The situation is even worrying if these bonds are indexed on the euro zone inflation. In the past, that method was preferred because France had for a long time the reputation of being a bad pupil and had an inflation rate superior to its neighbors. It is not any more the case today because since the beginning of the year, French prices increase is fluctuating between 5 and 6% when in the euro zone, it is between 8 and 9%. In the past, the State had issued huge amounts of bonds carrying rates above market ones and had cashed every year issuances premiums of several billions. These resources would be much better employed if they were used now to reimburse by anticipation the indexed bonds instead of issuing new ones.
Instead of multiplying catastrophists announcements, the minister of Finance and the French Central Bank would better employ themselves to dictate a more rigorous management of the debt and its financing and put an end to the practice of indexed on the euro zone inflation issues which will weight on the future reimbursements.