“Within the eurozone, no state presents a serious risk of default”

Within the eurozone, no state presents a serious risk of default”

[From ‘Coulisses de Bruxelles’]

Since the beginning of the banking crisis, states have massively increased debt: the total amount of issues has currently reached around $3 trillion, including the American recovery plan, which represents a twofold increase in comparison with a ‘normal’ year. Are states meeting difficulties in financing their plans to support the banks and economies? Does the divergence in interest rates required by the markets in different countries within the eurozone threaten its existence? Philippe Mills, director of the French Treasury Agency (Agence France Trésor/AFT), speaks exclusively to Libération. This agency, founded in 2000, is charged with selling and managing the negotiable public debt in the taxpayers’ best interests. Its effectiveness is acknowledged across the world.

Is there enough money in the markets to withstand the explosion in public debts?

For the moment, the answer is positive. If nations are issuing such debts, it is because they are henceforth playing the role of ‘last-resort lenders’: they have taken the place of other issuers, notably private institutions such as banks and insurance companies who are today unable to do so, either because they have been markedly devalued, or because the conditions on which they could issue are considered to have become too expensive. Since 2006, the total of obligatory issues by banks and insurance companies, on a European level, has thus gone from 700 million to €300/400m, according to analysts’ projections.

What is the total of French market debt?

On the 31st December, 2008 the negotiable public debt of France was established at €1017bn. The debt service, or just the interest payments, for 2009 has increased to €43bn (more than 2% of GDP).

Is it a problem that more than 64% of this debt belongs to non-residents?

No, quite the opposite. The fact that the holdings in French debt are very diverse, in terms of investors and geographical origin, indicates that France does not depend on one category of investors and that the conditions of its finance are at once secure and good value, because of competition. It should be noted that the investors have an obligation to France and not a share accompanied by voting rights. They cannot, then, influence the direction of public policy, nor can they request an anticipated repayment for the underwritten debt.

In the present context, how do you bring investors to buy French public debt?

In the most concrete terms, I or my assistant Sébastien Boitreaud as well as staff of AFT, regularly go to meet investors. For us, it involves explaining the management of the French public debt and the structural reforms, as well as the European and French economic situations. Each year, this direct contact with investors brings us to make more than twenty trips, be they in Europe or indeed to Asia, the Golf or the Americas. This close relationship of trust is essential on the financial markets.

For several weeks, there have been reports of an ‘inevitable crash’.

We have already seen such a crash, in 1994 when the Federal Reserve brutally increased its interest rates, which led to a significant rise in rates right across the markets (more than 2% in one year) and thus a drop in the price of bonds. But there is no risk of a repeat of such a scenario, with no central bank announcing a rates increase at short notice. An inevitable crash can also result from an imbalance between demand and supply. But, as I have just said, this is not the case today.

At the beginning of January, Germany did not manage to sell the entirety of the bonds it was offering on the markets: of €6bn, they only managed to raise €4.1bn.

When the sale is not covered, that does not mean that a state is not capable of financing itself in the medium term. It simply means that there is a temporary dysfunction in the financial intermediation system. During its sale, Germany was only offering a single security. Is that what the market wanted at that exact time? That is not clear. Since the beginning of the crisis, for example, France has been systematically offering three kinds of security. At the beginning of February then, we have two which mature in ten years and one which matures in thirty years. So we have a more diverse supply, able to meet the demands of investors. On the other hand, Germany does not have the same relationship with its banks as we do. The charter which ties France to its banks creates an incentive for them to participate in each sale of securities. Lastly, we all know that the German finance agency can conserve the securities issued, to resell them at a later date on the secondary market. In other words, the cover of a securities issue does not have the same meaning as in another system. In brief, that a German securities issue is not completely covered, as happened previously in 2008 or happened last week to a ten-year security, in no way indicates that Germany is not able to finance itself.

Since September 2008, there has been an increasing spread in interest rates within the eurozone, whereas previously Germany and Greece financed themselves according to almost equivalent conditions. Are the markets betting on a disintegration of the eurozone?

I don’t believe so. In the context of the crisis we are experiencing, investors are discriminating more than beforehand between the various issuers of securities, taking account of their credit rating as evaluated by the notation agencies (triple A, double A, A+, A, A-, etc.). When a rating is downgraded, as has been the case in Greece, Spain and Portugal, that has an impact on the way in which countries finance themselves. That explains, in part, the variation in interest rates between countries within the eurozone: There is an added credit risk, according to the market evaluation of the long-term sustainability of a country’s public finances.

Moreover, the present crisis is also a crisis in the financial intermediaries: on the public debt market, it is banks who sell national debts to the final investors. That means that, for a period of time, they keep the public debt in their accounts, to later sell it on. Since the beginning of the crisis, these financial institutions have tighter accounting restrictions than before, they are obliged to get themselves out of debt. They are thus choosing those national debts which are easiest to sell quickly, so as not to have them on their books, which disfavours those countries whose debts have less liquidity, notably smaller countries. In effect, they have a more reduced debt, and consequently a reduced daily volume of exchange and a less diverse range of instruments to finance themselves. Briefly, as their debts risk weighing down the banks, the latter are less inclined to sell them, hence the increased interest rates.

So the banks are partially responsible for the degradation of financial conditions within the eurozone?

It is to be expected that banks will improve their balance sheets, all the more since there is a regulatory aspect to the matter, since they must show a certain capital stock. Even so, these explanations do not justify the spread in interest rates that has been reached. There is clearly an over-reaction in the markets.

Has the declared willingness of the member states of the eurozone not to abandon the single currency, nor to purge public finances once the crisis is over, reassured the markets?

Absolutely. But the markets have also noticed that the supposedly fragile states are managing to finance themselves, even if it does involve conditions less favourable to the core countries (Germany, France…). For example, on the 10th February, Greece succeeded in selling €7bn in securities, which is a lot. And it recorded orders for €10.5bn. Yes, it did it a cost of 250 basis points more than the equivalent German security (an interest rate of 4.4%), but the rate at which it is financing itself remains relatively low despite all that.

Is this spread not a good way to force the less virtuous nations to purge their public finances? Because if a state has to pay more for its debt, it will avoid letting its accounts deteriorate…

Before the crisis, the interest rates enjoyed by the members of the eurozone were all very close. Greece financed itself at twenty basis points above Germany. It is unclear whether that precisely reflected the differences in liquidity and security in their credit ratings. It is possible that, once the crisis is over, the difference in debts will remain higher than it was in the past. These differences are not surprising within a single currency zone: in the US, the rating of each state varies just as it does in Europe. Only ten of them have a triple A rating. If the conditions on finance are not the same within a federal state, which the EU is not, what is surprising in that being the case in the eurozone?

Does the lack of a solidarity mechanism between members of the eurozone concern the markets, or does nobody imagine that that the EU would let one of its own default?

It is difficult to establish to what extent this subject concerns the markets. In any case, within the eurozone there is no state that presents a serious risk of default. Even if Greece’s credit rating has been downgraded, it it nevertheless remains excellent, as indicated by the notation agencies themselves. In other words, its rating is a source of attraction to investors. The notation agencies, the financial intermediaries and investors have faith in the eurozone’s ability to finance itself, even if this may vary slightly between states.



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