"Inflation-linked bonds blow up in our face", we wrote on July 7, to denounce the scandal of these toxic loans (10% of the total, €250 billion). Now that inflation has returned, they are costing us a fortune: €15 billion in interest to be paid in 2022, while for bonds issued at fixed rates (90% of the total), the additional cost is only €2 billion. And these €15 billion are a low estimate, calculated with inflation at 6% (15/250 = 0.06, the interest paid divided by the stock), but they will turn into €20 or €25 billion if inflation at the end of the year is 8 or 10%. This is because most of these bonds are indexed to inflation in the eurozone (OAT€i), not to inflation in France (OATi), which is slightly lower.
And above all, why does the government continue to issue these bonds when inflation is back in the spotlight? Why this suicidal stubbornness? We hypothesized that France is obliged to do so in order to satisfy its clients. Let's put ourselves in the shoes of those investors who buy French debt at fixed rates, and a portion at variable rates: with the return of inflation, they limit their losses, as the OATi and OAT€i provide them with very significant revenues that compensate for the poor performance of fixed-rate bonds. If the government decided to stop offering these products, which are very profitable for them, they would move away from French debt and its rates would rise, like Greece in 2011, or Italy as soon as a crisis approaches. Bankruptcy would not be far off.
On July 25, Bruno Le Maire confirmed our hypothesis, answering a question from a member of parliament. Bercy continues to issue these securities because they "meet a very specific demand from insurers, life insurance, Livret A and Popular savings book (LEP)" he explains:
"Bruno Le Maire confirms my hypothesis: Bercy continues to issue inflation-indexed bonds (OATi) out of tender to the usual clients (but it costs the budget a fortune!). Thanks to Jean Philippe Tanguy for asking the question."
Bruno Le Maire confirme mon hypothèse : Bercy continue d’émettre des obligations indexées sur l’inflation (#OATi) par soumission aux clients habituels (mais ça coûte une fortune au budget!). Merci à @JphTanguy d'avoir posé la question.— Philippe Herlin (@philippeherlin) July 26, 2022
We take the liberty of questioning the word of the Minister of the Economy: this is a request from the clients of French debt, certainly, but not those he designates, otherwise the savings of the French would yield more. No, it is above all a demand from foreign clients who can easily abandon French bonds to invest in other countries. These "non-resident" investors, according to the official terminology, hold 48.5% of France's debt (AFT monthly bulletin, page 4). Their defiance would immediately trigger a deep crisis.
It is even more than a request, it is certainly blackmail: "if you stop issuing these bonds that bring us a lot of money, we will stop buying your debt", say the major international investors to France, which abides by their demands.
This means that France's 10-year debt rate (the market rate, when investors trade our debt), the benchmark rate used to compare different countries around the world, is simply wrong. It is a lie. It is advantageous because there is a "surprise gift" that artificially lowers it. Without these OATi and OAT€i, the French debt rate would be at or above that of Italy. But the explosion of the cost of this indexed debt will make this subterfuge less and less tenable... Inflation-indexed bonds may not hide the misery much longer. France's debt will soon be watched with concern by the markets.
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