Saturday, November 29, 2008

French Public Debt

In preparation for next week's expected announcement of a major French stimulus package, Philippe Mills, who is in charge of managing France's public debt, launches a pre-emptive strike against critics who will worry about the cost of servicing a still larger debt (France pays a premium of 40 basis points over Germany, whose bonds are considered less risky) and about the increased flow of cash beyond France's borders to foreign creditors, who currently hold 62% of outstanding French bonds. Etienne Wasmer is less sanguine.

It should be noted, however, that French household debt is relatively low compared with other European countries, although it has risen sharply in recent years, owing mainly to rising housing prices.

6 comments:

kirkmc said...

I don't think the increase in household debt is due to rising housing prices. I think it's due to the introduction of credit cards (as opposed to debit cards) and other consumer debt-mongers. One TV mag we get regularly has a half-dozen full-page ads for loan companies, who, of course, charge very high interest rates. They lend sub-prime consumer loans, and the French are getting suckered into "revolving" credit.

Arthur Goldhammer said...

Kirk,
From 2005:
"La part des prêts à l'habitat est prépondérante", relève aussi l'Insee.
"Les crédits à court terme croissent également", à 2,1 milliards d'euros, "soit le flux le plus élevé depuis 2000, mais représentent toujours moins de 5% de l'endettement des ménages", selon l'institut.
http://tempsreel.nouvelobs.com/actualites/20050525.OBS7755/

See also:
http://www.banque-france.fr/fr/stat_conjoncture/telechar/comptefi/eagnfi2.pdf

http://www.banque-france.fr/fr/publications/telechar/bulletin/etu144_1.pdf

http://www.banque-france.fr/fr/publications/telechar/bulletin/etu144_3.pdf

Thanks to Eloi Laurent for pointers.

Arthur Goldhammer said...

Here's some more recent data:
http://bdfbs-ws01.heb3.fr.colt.net/fr/stat_conjoncture/telechar/comptefi/eit3.pdf
Note the relatively slow growth rate of household debt with maturity < 1 yr, which would include credit card debt, compared with debt of longer maturity.

kirkmc said...

I think the two areas where the French have always borrowed money are for homes and cars. I think what's new is that they are borrowing money for other things. They may have increased mortgage amounts, but they're also increasing other loans. I wonder if those figures include debt on store cards, which, I'm told, can be very high. I don't have any, nor do I have any credit cards; I don't believe in going in debt for consumer goods. And for a long time the French didn't either; they do now. Bear in mind that home loans here can also be for fixing up a house; I don't know if that distinction is made in the US (home equity loans, perhaps, but they can be for anything). So anyone buying a home here will borrow money, but anyone wanting to fix up a home - and that at a lower rate of VAT for now - can do so as well.

bernard said...

Household debt and government debt are two very different cookies. Government debt is composed of marketable fixed income securities (notes and bonds), whereas household debt is debt that they incur one way or another to banks. And, unless one were to suggest securitising household debt which in the current environment is quite doubtful, they will remain fundamentally different.

It is a fact that treasury spreads have blown out enormously in the current crisis, which is mainly characterised by disfunctional markets, except for government debt, whose yields remain historically low (3.5% in the French case).

A fair spread to german debt at the 10 year maturity would be more like 10 to 15 bp. What is reflected here in my view is not a major difference in credit quality, but rather a pricing of liquidity and the remanence in the investor community of reflex action linked to the "what if the Euro blew up" scenario. This is of course ridiculous because if this financial crisis has a policy consequence in Europe, it will be to enlarge the Eurozone to some countries who are not members currently, provided Eurozone countries accept that they meet the required criteria for joining (there are membership fees due in this club, contrary to what many believe).

A prime candidate could be the United Kingdom as it would be well advised indeed to consider very seriously joining not too far in the future, as its currency is looking quite wobbly in conjunction with the massively oversized balance sheet of its banks. Naturally though, at the moment, prospects for the UK government borrowing requirement are much too large compared to the criteria, even though of course the UK government debt ratio is relatively low (though I am not sure how the nationalized bank liabilities will be treated in this respect).

In short, while Largarde and Cie's public view regarding economic prospects should be viewed with a quite critical eye, Philippe Mills's remarks are in this precise case absolutely correct. I participated early on in the internationalizing of French government debt, which is an extremely positive development as it provided a massive increase in the liquidity of such debt and therefore led to more stable and to reduced yields. Mr Wasmer might consider checking when France last had 10 year yields in the 3.5% region (that is actually too low, but this would be another story). Suffice it to say that a "protectionist" attitude on government debt reflects a fundamental misunderstanding of what markets are meant to do.

Arthur Goldhammer said...

Sorry if my title was misleading. I'm well aware that public and household debt are different animals. I just wanted to touch on both in the post, even though the referenced post was about public debt. The italicized nouns were meant to convey the contrast.

Bernard, could you clarify what you mean by "pricing of liquidity." Are you saying that the market for French sovereign debt is thinner than that for German sovereign debt? Why should that be, especially if 62% of the debt is held outside France and not subject to governmental pressures on institutions to hold rather than sell? The amounts of debt outstanding are comparable, are they not?

Finally, I don't think Wasmer is advocating "protectionism" on French debt. He's just pointing out that government borrowing to fund a stimulus package will increase the share of national income flowing to foreigners if current patterns of debt holding continue.