France Continues to Attract Investors, but Its Public Debt Worries Economists

General government consolidated gross debt as a percentage of GDP via Randam CC-BY-3.0

General government consolidated gross debt as a percentage of GDP via Randam CC-BY-3.0

Five years ago, France's public debt peaked at 80% of GDP, but it is now approaching a debt ratio of 100%. This conjecture puts France at risk of being plunged into a difficult position in the financial markets. Governments usually borrow by issuing securities, government bonds and bills. In layman's terms, the more debt a country holds, the less money it's able to put away in savings and reinvest in the nation's economy. 

The burden of debt per capita is 30,300 euros. Last August, French debt exceeded the symbolic threshold of 2 trillions euros, an increase of nearly 90 billion compared to January, a rise of 4.7%. The announcement came one week after the French National Institute for Statistics and Economic Research (INSEE) report, showing a second consecutive quarter of zero growth in France.

Has France reached a critical threshold?

The Organisation for Economic Cooperation and Development (OECD) has already warned of “anaemic growth” and a risk of deflation in the eurozone. And now it seems that French public debt could reach 98% of GDP by 2015. This increase can be attributed to the rising deficit together with afeeble inflation and growth. Laurent Bigorgne, the director of the economic think tank Institut Montaigne, asserts that:

On ne peut anticiper aucune stabilisation de la dette, cette année, et même en 2015, elle devrait continuer de progresser dans les mêmes proportions.

The debt is not expected to stabilize this year, or even in 2015, and is likely to continue to rise at the same rate.

That’s what’s in store for next year. Paris will join the club of countries with three-figure debts. France will overtake Italy as the largest borrower on the international markets, within the eurozone, which means that France will find itself in a very precarious situation. With economic growth at a standstill – tax revenues evaporating, and deficits increasing more than expected – and at the same time almost zero inflation, its economy will take a battering; this is a giant task for the Ministry of the Economy at Bercy to tackle as it is unclear how this debt can be reduced.

Even though it remains a top priority, France is devoting more than 45 billion euros solely to paying back the interest on our loans, meaning that it will take all the income tax revenues, for example, just to pay that interest. Reversing the trend would require a return to robust growth; substantial cuts in public expenditure; and a more dynamic European environment. However, there haven't been many short-term developments in terms of these three issues. Bear in mind that the OECD has just cut its growth forecast for the eurozone, particularly France. In practical terms, therefore, France’s debt will increase even more, probably by more than 70 billion euros next year, ultimately reaching 100% of GDP.

Creditors are still accommodating 

Paradoxically, France is currently borrowing at historically low rates; never before has it benefited from such low borrowing costs. So France continues to accrue debt, even borrowing at negative rates, and on short-term maturities. Just three days ago, France raised €8 billion at negative rates, which is proof of the market confidence in the country.

70% of France’s public debt creditors – banks, pension funds, insurance companies, and sovereign funds – are non-resident. Many of these foreign creditors, however, reside within the eurozone. So 52% of Germany’s and France’s debts are held within the eurozone and are euro-denominated. The fact that the debt is held by foreign operators can be seen as both a strength and a weakness.

On the plus side, it is proof of France's ability to attract investment; the high scores given to France by the major rating agencies are a reflection of market confidence in the country; the down side is that a high level of debt held by non-residents means that the country is susceptible to international conjecture – as with Greece during the sovereign debt crisis – which could lead to an explosion in interest rates and greater problems with borrowing on the markets.

It is true that France is benefiting from an extraordinary financial environment, and borrowing at low rates. But can this last? 

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