The phenomenon is not new: the state of public finances is of concern in high places. In recent months the deterioration of the public accounts has been the subject of numerous warnings from the great treasurers of the State, from the Banque de France to the Court of Auditors. The Minister of the Economy Bruno Le Maire himself, despite being accountable for the country’s budgetary situation following having opened the purse strings wide open during the health crisis (without having really closed them so far), affirmed june than « lon alert » (was) « achievement ».
The lights are turning bright red in the eyes of economists, and not only on the amount of debt which is close to 3,000 billion euros, following a jump from 97.6% of GDP at the end of 2019 to 114.1% today. The final warning came on Thursday from President of the Court of Auditors, Pierre Moscovici, who asserted that « we cannot live under the illusion of free debt”. And made the burden of debt sound « main point of concern ». What is this debt load? Why is it becoming problematic for France? Should we worry regarding its consequences in the future? The Tribune make the point.
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What is the debt load?
The debt burden corresponds to all the interest that the State undertakes to pay when it borrows money on the financial markets, in addition to the reimbursement at a specific due date of the amount borrowed, which is called the « principal ». In France, this interest on the debt has cost the public authorities around « 35 billion euros in 2021, and around 50 billion euros in 2022 », believes François Ecalle, former senior official at the Court of Auditors, specialist in public finances which he deciphers on his reference site Fipeco. The interest charge will thus increase by an additional 17 billion euros this year according to Bruno Le Maire. “And the rise will continue”warns François Ecalle.
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Why is the debt burden increasing?
The financial landscape changed radically at the end of 2021 and the beginning of 2022. The decade 2010 was that of the « free money », that is to say very low interest rates, sometimes zero. Even negative as on 10-year French government bonds in 2019 and 2020. A paradoxical period in the sense that European states might borrow more without their debt burden increasing proportionally. Budgetary facilities made possible by the very accommodating monetary policies of the European Central Bank and the Federal Reserve, whose key rates were kept very low in order to support credit and economic activity at the end of the Covid crisis.
This era is over. The general rise in prices, supposed to be temporary due to the post-pandemic recovery, has taken hold since the war in Ukraine which precipitated the spike in the cost of energy. However, 12% of the French debt is indexed to inflation, which means that interest rates rise mechanically at the same time as inflation. Hence the additional 17 billion euros in short-term debt charges.
Inflation is also weighing on French long-term debt. Central banks have no choice but to raise their key rate, the only monetary lever to stem inflation. This means that government borrowing rates are already becoming more expensive. Loans contracted by the State from investors in the form of bonds have an average maturity (reimbursement term) of eight years. The benchmark government bond matures in 10 years. It is at these maturities that the debt burden will significantly swell. The liberal think tank iFRAP puts forward the figure of 100 billion euros in debt charges in 2027, once morest 35 billion today. « A plausible estimate. A one-point rise in the interest rate on French bonds means 40 billion euros in additional spending in 10 years » according to François Ecalle… Or the equivalent of the annual defense budget. The expert also points out that the debt burden is also growing because of a « debt volume effect » which continues to soar. Because the more the State takes out loans, the more interest it has to repay.
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What are the risks for France?
Does the specter of a payment default hover over France, unheard of since 1797? Obviously not for the moment, but the problem of the debt remains intact. “The public debt situation has not changed radically with the rise in interest rates and jointly that of the debt burden. Remember that, like an individual, the State must repay the interest on its credits but especially the principal. Admittedly, interest rates have a cost, but it remains much lower than that of the principal. Today, France returns the principal to its creditors… by going back into debt. We should be able to repay the principal as well,” judge François Ecalle.
The latter recalls the importance of regaining control of the trajectory of the debt in order to prevent it from spiraling. As long as inflation is higher than interest rates, such a scenario does not emerge, according to the former collaborator of the Court of Auditors.
For the time being, the government is making the costly protection of purchasing power its priority ahead of debt reduction. Purchasing power law which must be voted this summer, should cost around 20 billion euros to the State. Regarding the return to a budget deficit below 3%, Elisabeth Borne predicts it for… 2027.
