For a long time (from the ‘90s to the mid-2010s) two-thirds of France’s public debt was held by “non-residents” – i.e. foreign investors – which represented a risk in case of mistrust (possibility of massive sales or crises). But things are starting to change: In 2014, 63.9% of the public debt ¹ was held by those non-residents; in 2017, this number has dropped to 55.5%. And the slack hasn’t been picked up by the French banks and insurance companies. As a matter of fact, their debt holdings are also diminishing slightly. So where is all that debt now? Simple: with Banque de France.
How did this happen? As we know, the European Central Bank launched a QE plan in 2015 consisting in monthly purchases of 80 billion euro worth of sovereign bonds (from now on down to 30 billion euro). But this policy is concretely implemented by national central banks, at 80%, and by the ECB, at 20%. Surprised? Well, not really because, as we’ve discussed in our preceding article about Target2, the euro is not a real single currency, but rather a form of hybrid money functioning with a network of national central banks supervised by the ECB.
Thus, as months go by, Banque de France has been buying sovereign bonds. It now owns 17.7% of that debt, as shown by the February, 2018 Bulletin (page 4) of the Agence France Trésor, the organism in charge of managing the State’s debt. This fact is not explicitly recognised, however, since this number can only be found in the “others” category...²
Moreover, we just learned that Banque de France will pay 5 billion euro to the State, more than the 4.5 billion euro of 2016 and, as Agefi explains: “The increase in the net income of Banque de France is due to an increase in the size of its balance sheet – from 855 billion to 1,054 billion euro – for which the continuing purchases of bonds for the European Central Bank essentially accounts”
We can see the whole scheme in play: the State issues bonds in order to finance its deficit... a significant portion of those bonds is purchased by Banque de France... which increases its benefits by cashing in the interests on that debt... and increases its payments to the State... that can keep borrowing more. And the more public debt Banque de France owns, the more interesting it gets for itself. These extravagant operations amount to financial cavalry.
Being able to get financing entirely from one’s central bank – at zero cost and without any outside constraint – is the dream of any spendthrift State... until bankruptcy (either by default or by hyperinflation).
The Euro zone, as a whole, is functioning along with this pattern (except Germany, which has a budget surplus). So there you have it... after our articles on the banks, it was the State’s turn, which is not really better managed. But hey, spring is here today... smile!
¹ France’s public debt amounts to 2,226 billion euro, according to INSEE’s last count, the most part of which is represented by the State’s debt (1,795 billion euro), the rest coming from local communities and social security.
² March 2017’s Bulletin (page 2) lists the buyers of French debt (OATs) for January and February, indicating that Euro zone’s central banks buy 29% of it. Moreover, before the advent of QE, the “others” category represented only 4.6%. CQFD.
Reproduction, in whole or in part, is authorized as long as it includes a link back to the original source.
Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.