France is making the news at the moment in a variety of ways. The clearest is the protests against the raising of the state pension age from 62 to 64. As a Londoner I also note the 90% vote against rental e-scooters in Paris as to be frank they have become a public nuisance in my area via the way the business model encourages users to leave them anywhere which more than a few take very literally. Also there is the way that France put price caps on energy prices. This has reduced inflation but put pressure on Edf and the public finances.
As well as being a current issue the public finances have been a source of stress for France. There has been some news this morning from the French Treasury.
| Government Budget Balance (Feb) ||
€ -50.3B (Actual)
€ -21.2B (Previous) ( @YTradingAdvisor )
These days 50 billion has been reduced in impact by the large borrowing we saw over the Covid pandemic. So let us look deeper.
The public deficit for 2022 stands at €124.9 billion, or 4.7% of gross domestic product (GDP), after 6.5% in 2021 and 9.0% in 2020.
That was from the French statistics office last Tuesday. On Friday France 24 reminded us of if not an old friend a past issue for this topic.
The figure for public debt might appear shocking at first glance, especially when set against EU fiscal rules outlined in the 1997 Stability and Growth Pact, which stipulate that national debt should not surpass 60% of GDP.
Budget deficit, meanwhile, should not surpass 3% according to the same guidelines.
In spite of a lot of rhetoric this was something of a dream. But some Euro area nations found themselves under criticism from France and Germany and indeed fines for breaking these rules. So there is underlying resentment. Staying with the media Le Monde looked at it like this on Friday.
The course has not been crossed, but the order of magnitude remains dizzying. The French public debt has been approaching 3,000 billion euros for several months. Three to four times more than in 2000.
It then goes on in a particularly interesting fashion because apart from the specific reference to Insee this applies to many countries.
The political color of successive governments does not change the situation: progress has been continuous, punctuated by crises, alarmist reports, warnings from the financial markets and the staging austerity plans never really applied. Each quarterly publication of INSEE gives rise to its share of resigned declarations, denouncing pell-mell the supposed addiction of the country to public spending or the cowardice of a political class always recoiling before the unpopularity of the task.
The Trend
Whilst the official view from Economy Minister Le Maire concentrated on the 2.6% economic growth that brought the deficit number below 5% of GDP there are more troubling trends. Firstly France has gone 9% to 6.5% to 4.7% all of which are above the 3.1% of 2019. If we switch to the latest review from the International Monetary Fund we see that it has a familiar pattern.
This should be followed by a steady, expenditure-led consolidation until reaching a structural deficit of
0.4 percent of GDP in 2030, consistent with France’s previous medium-term objective.
Virtuous at a future date usually beyond the political life span of those now in government. Actually if they follow the IMF recommendations which were from the en of January we now now we could expect years of unrest.
Doing so would require a sustained annual effort averaging 0.7 percent over 2024-30, for a cumulative effort of about 5 percent of GDP relative to staff’s baseline.This would bring public debt on a firmly downward path from 2024.
Whilst the IMF is not French run for once maybe old habits die hard. Also as events have passed they might want to rewrite this bit after the collapse of Credit Suisse.
The banking sector has weathered the crisis soundly, though financial stability risks are increasing.
Stresses are of course higher now.
If you work in fixed income sales and trading, Credit Suisse’s analysts suggest the banks to be avoided are either Barclays or SocGen. As the chart below shows, this is where year-on-year revenues are expected to fall by the most in the first quarter and then during the year as a whole. ( efinancialcareers )
Bond Yields
We can take the issues in fixed income further because on a national level there is this.
The European Central Bank (ECB) on March 16 increased interest rate by 50 base points to 3.5%, the sixth consecutive hike since July 2022.
Meanwhile, French 10-year bonds currently yield around 2.8% after surpassing 3% earlier this year. ( France 24 )
This is very different to the ECB driven period when France did this.
“Between 2020 and 2023, €300 billion have been injected into the economy,” deputy director of SciencePo University’s centre for economic research (OFCE) Mathieu Plane told Le Mondeas he pointed to discretionary expenditures decided by the government. ( France 24)
Until pretty much the end of 2021 we saw an example in real life of what the economics text books call a “free lunch”. That is because France was paid to issue new debt as it had long periods of a negative ten-year yield. Now thought debt costs.
“The annual cost of public debt is the second item on the State budget” right after public spending on education, Montaigne Institute economy and State action director Lisa Thomas-Darbois told AFP.
Compounded by the fact that one tenth of French public debt is indexed to inflation, public debt interest has cost France around “35€ billion in 2021 and around 50€ in 2022”, Ecalle said. ( France 24 )
This is something that is a brake on both the French government and the economy. In a way the same agent is in play here because it was the European Central Bank that sent many bond yields in the Euro area into negative territory and it is the ECB trying to raise them now.
Comment
In the end much of whether debt is affordable depends on economic growth. Regular readers may recall that I have pointed out in the past that official documents try to forecast 3% growth not because they believe it is likely but because of the impact on the public finances! Perhaps the most extreme example of this was Greece where 2% per annum was forecast only because even the most credulous would question 3% to flatter the numbers. Of course the economy collapsed and the public finances needed a bailout.
The issue is that these days we not only do not get much growth, but we are increasingly prone to crises. Whilst the outlook has brightened due to lower energy prices not much growth is expected for 2023. That is reinforced by this morning’s PMI release.
“The continued downturn in France’s manufacturing
sector raises questions about the underlying strength
of the country’s economy, despite the earlier released
‘flash’ PMI survey revealing a strong upturn in the
service sector
If we do not see much growth then more eyes may turn to these numbers from the Governor of the Bank of France.
According to our estimates, each 1% rise in rates will lead after 10 years to an increase in the annual interest charge of 1 pt of GDP, and an increase in the debt of 5½ pt of GDP, compared to a situation without rate hike. Each 1% rise in interest rates therefore ultimately represents an additional annual cost of nearly €40 billion, or almost the current defense budget
Plus we see that France faces something of a private-sector dent burden too.
In this respect, I would like to point out that France’s debt ratio is the highest of the major European countries at 147% of GDP in Q3 2022, compared to 119% on average in the euro area.
There is another twist to this tale which is in some ways the French government like others can take a more relaxed posture as inflation will boost revenues. The problem is more for workers and consumers who get a further squeeze in what are hard times.