The French Government Is Not Concerned With Its Public Debt – Here’s Why

Here are the numbers: France’ public debt has reached €2,299.8 billion, the equivalent of 99% of its GDP. This debt is composed mainly of State debt (€1,828.4 billion) and social security (€211.9 billion), local regions (€199.4 billion) and central administration organisms (CNR, CEA, the Louvre museum, Météo France etc.: €60.1 billion).

Public debt keeps growing year after year since deficits – State ones being the largest – persist. But we’re stunned that the State budget keeps shrinking! For what reason? Because of zero rates, of course. Indeed, when a loan comes to maturity, the Agence France Tresor issues a loan of the same amount, but with much lower interest rates. The former loan, dating back many years, had been contracted at higher interest rates. Replacing it with a lower rate loan thus constitutes an excellent financial operation for the State!

Thus, as explained by IFRAP, basing its findings on a note from Banque de France, the charge of public debt (payment of interest), as stated in the State budget, has kept decreasing between 2011 and 2017, going from €55 billion to €42 billion. This is what has mainly contributed to the global effort of deficit reduction under François Hollande. Emmanuel Macron shall benefit from the same boost, since the charge of the debt will decrease yet of another €10 billion to reach €32 billion in 2021. But afterwards, the effect will stop because all the stock will then have been renewed at low rates. 

Its’ like magic! Deficits persist, debt is increasing, but the weight of the debt in the budget is shrinking! That shouldn’t prompt governments to uphold the bar... One can easily predict they will let the situation rot until 2022, when the next presidential election takes place. Afterwards, we’ll see...

So we shouldn’t have to worry about the debt until 2022? Well, hold your horses now! 

First of all, let’s not limit ourselves to the debt stricto sensu. The IFRAP article reminds us that the Cour des comptes has calculated that the off-balance sheet (implicit) of the State represents, as of December 2017, nearly €4,165 billion, of which €2,429 billion are liabilities for State workers’ pension plans. There lies a charge that will weigh heavily on the public accounts in the years to come with its inertia. It would be best to take care of this problem now. 

And then, this little known fact: if the State has borrowed at a fixed rate, it also had the stupid idea of issuing loans based on inflation, for around 10% of the total. However, according to the Cour des comptes, an increase in inflation of 1/10 represents an immediate additional charge of €200 million. 1% inflation is €2 billion, and if prices skid following a crisis in the euro area to, say 10%, it would make it to €20 billion in one shot (being added to the remaining 90%). At this level, France runs the risk of not being able to borrow on the markets and find itself in bankruptcy (I had denounced tbat loan in April 2018). 

And, one day, interest rates will have to rise again... perhaps before the end of this year, if Mario Draghi’s successor at the ECB decides to implement them. One can easily see what this situation will entail by looking at the situation in the United States, ahead of us, since they already started to raise their rates : between the last quarters of 2010-2018, the charge of interest rates on the federal debt has gone from €404 billion to €565 billion, an increase of 40%! Washington has the luxury of using its world reserve currency status to start its printing press, but France could hardly support such a jump. No, really, it’s a grave error to remain unfazed by the public debt...