France Issues 10% of its Debt in Inflation-Indexed Securities

Published by Philippe Herlin | Apr 5, 2018 | Articles

In our last article, we explained how Banque de France owned close to 20% of the country’s debt and how that part was growing rapidly – some financial cavalry that doesn’t bode well. This time – here exclusively because it is not mentioned anywhere else in the media – here’s new proof of the incompetence of French governments to manage the country’s debt.

It is often said that a good wave of inflation helps cleaning out the debts – history has proved it many times. When prices remain high for a number of years the real value of public debt shrinks to almost nothing. But, however, this will be impossible from now on, because the State has forfeited this possibility – it even put a knife to its own throat in case of hyperinflation.

In October, 2001, the French Treasury had the very unfortunate idea of launching the first bond indexed on the Euro zone’s price index – OAT€i. “Classic” Treasury bonds, OATs (Treasury convertible bonds), are issued at a fixed rate. If rates rise, the State is protected (borrowing costs remain the same) and, in the case of inflation, it reimburses in a devalued currency (borrowing costs are then actually lower). In both cases it wins.

But with a bond indexed on inflation the State has to reimburse at inflated prices, and a period of hyperinflation could ruin it entirely! So why are they taking this insane risk? In a word, to make money. Investors are attracted by these bonds which let them hedge against inflation. They sell well, thus are cheaper in terms of interest rates, which lets the Treasury reap some monetary benefit. This is a shabby and pathetic short term view... Après moi, le déluge (after me, the deluge).

In its last bulletin, Agence France Trésor (AFT), which manages France’s debt, proudly announced the placement of an 18-year OAT€i. This means the Treasury is betting that the prices will remain stable for the next 18 years... We are not even the masters of our own destiny, since this inflation rate is measured in the whole of the Euro zone, not in France. And if we lose this bet, will someone be held accountable? Of course not... they will live in happy retirement, paid for by the French people. But AFT proudly says: “With this issuance, France, which has committed to issue 10% of its annual State financing programme in index-linked securities, has reaffirmed its status as a benchmark issuer in the euro area for long-dated index-linked securities.”

France, European leader of inflation-indexed securities, “for long-dated securities”... No one seems to care at all. After all, this has been the main attitude of the governments since 1974, when they had their first budget deficit.

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Philippe Herlin  Finance Researcher / Member of the Editorial Team


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