On Monday, France borrowed at a negative rate, which means investors are losing money... they’re paying to deposit their money! Even though this is for short-term loans (3, 6 and 12 months, for a total of 8.2 billion euros) at rates slightly below zero (-0.002% to -0.004%), this hadn’t occurred since May of 2013.
At the same time, Germany also borrowed at negative rates, while its economic situation is quite different than France’s: Germany experienced a budget surplus in the last quarter, whereas France couldn’t even manage to keep its deficit at 3% of GDP; unemployment in France is double that of Germany; Germany’s commercial balance had a 200-billion euro surplus, whereas France’s had a 60-billion euro deficit. And this list could go on and on (businesses profitability, percentage of exporting small companies, level of investment, quality of professional formation, etc.). How can two countries with so little in common borrow with the same ease on the international markets?
Well, actually, they do have one thing in common: the euro... which helps, especially in the case of France. With that being said, how to explain that investors are buying debt from France at the same conditions they do from Germany? Analysts talk about the “flight to quality”: Much of the abundant liquidity looking for appreciation around the globe is fleeing the emerging countries, mostly unsafe with weak currencies, and, in the Euro zone, avoiding the peripheral countries, leaving only Germany, Northern Europe and France.
While this may be true, it is not the sole explanation; there is another: The French are great savers. Compared with the European average of 10%, the French save around 15-16% of their income, which translates into a tantalizing 3.6 billion euro total in savings (bank accounts, savings accounts, life insurance) parked in banks and insurance companies. In an answer to a journalist asking him if France could go bankrupt, François Baroin, a former finance minister in 2012, said that France’s debt was a “no-risk investment”, notably because “France has a high level of savings”. This minister who, of course, didn’t last long, had committed treason to the powers that be, beyond political lines, by stating that the State will not hesitate to plunder its citizens’ savings in order to face its obligations (3.6 billion euros of savings on the one hand, and 2 billion euros of debt, on the other hand...). And the universally-recognised quality of France’s fiscal police leaves no doubt as to the reality of this threat. This is what is reassuring for international investors... but not for savers, for sure.
We already know that failing banks will be able to help themselves into their clients’ accounts if need be, according to a European ruling, but a non-written law authorises the State to do the same; we have to be aware of that. And, as the situation in France is inexorably deteriorating (deficits are not reduced, there is zero growth, unemployment keeps rising), this scenario may very well play itself out. Where large international investors are concerned (U.S. pension funds, Middle-East sovereign funds, China’s central bank), it is not good policy to estrange them; hence, the French people will have to make sacrifices in order to defend “the State’s superior interests”... One can only picture our highest leaders on television explaining in a compassionate, but firm, tone, that “there is no other solution”. The more time passes, the more the French economy is sinking into recession, and the more this scenario becomes plausible.
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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.