While the film “A little something more” is a hit in cinemas, will the French debt still be successful with a little thing less? After Wall Street closed on Friday evening, Standard & Poor’s delivered its long-awaited verdict, confirming what had been feared for several months, namely the downgrading of French debt from AA to AA-. The minds were prepared. The American rating agency had expressed its circumspection on December 2, 2022, giving France a “negative outlook”, a traditional precursor to a downgrade.
The news must still have cast a chill in the upper echelons of Bercy, which had welcomed the stability of the opinions of Fitch and Moody’s a month earlier. What about investors? Will they be more suspicious of French debt?
More political than financial
In reality, the tricolor credit note has taken on a much more political than financial color. We can understand the pride of the executive in wanting to maintain the status of the sovereign debt at all costs, especially since the credibility of the Minister of the Economy and the Head of State has been badly damaged by the revisions in drop in public deficit estimates. The criticism has been fierce in recent months – Bruno Le Maire had to justify himself again, Thursday, May 30, before the senators of the finance committee.
Reproaches qualified, a few days ago, by the calculations of OFCE experts. The economists Mathieu Plane, Xavier Ragot and Raul Sampognaro joined forces to conclude that the crises experienced since Emmanuel Macron came to power and the one-off budgetary measures taken to limit the damage (partial unemployment, solidarity fund for companies, tariff shields, etc.) were able to contribute up to 69% to the increase in debt between 2017 and 2023. Enough to put the government’s incompetence trial into perspective.
One of the best signings
The agency now expects the debt-to-GDP ratio to increase to 112% in 2027, compared to 109% in 2023. It also points to the slippage of the public deficit to 5.5% in 2023, well above its forecasts, and does not see France managing to fall below 3% in 2027. So many arguments which weighed in the balance. Does this mean that the interest rates at which the State borrows on the markets will soar? That investors in sovereign bonds will turn away from French securities? No way.
The French debt has lost none of its charm. AA or AA-, our country continues to be among the best signings. “Investors, like rating agencies, do not only take into account purely quantitative factors. They look at the diversity of the economy, its industrial fabric, the political weight of the country… and France ticks a lot of boxes, says argue Olivier Vion, head of public sector capital markets at Société Générale Since the end of the Covid crisis, France has taken longer to recover its accounts than other euro zone economies. horizon it can return to a better financial balance. However, investors give credit to this return to normal.
French government bonds therefore continue to be popular with a very varied audience, from short-sighted hedge funds to long-term institutional investors. Among the latter, insurance companies. “In France, through life insurance, the weight of which is particularly significant, a large part of the savings of the French are invested in French debt. This is a structural support factor. Given the level of rates, demand is even a little stronger for debt products currently,” notes Jean-Christophe Machado, strategist specializing in European rates at BNP Paribas.
Added to this is the demand from bond asset managers. “Some must follow a benchmark, an index representative of a market, for example that of European sovereign debt. In general, France weighs around 25%, more than Italy and Germany. This implies systematic purchases for replicate the performance and composition of these indices,” he explains.
Return expected from Japanese investors
France also attracts many international investors, starting with Japanese insurers and banks. “The rates paid by French debt are higher than those of Japanese debt, continues Jean-Christophe Machado. Lately, monthly flows have been lower, but this in no way reflects distrust of the credit rating or a desire to reduce exposure to France We expect these investors to return to buying now that visibility is improving on the ECB’s monetary policy, with a rate cut expected next week. In Asia, French paper has other fans, including the central banks of Thailand, Singapore and even China.
Besides the fact that France has never defaulted, one of the main reasons for this success is the liquidity of the French debt, much higher than that of many issuers. A valuable and reassuring guarantee of being able to buy and sell it at any time. “BNP’s research teams have a very positive view of Spanish debt but its lower liquidity can be a hindrance for investors. Likewise, this factor can explain why the French and Finnish rates are close while the rating of Finland is better, at AA+”.
The argument is all the more decisive when the market trend is uncertain. Operators also appreciate the predictable nature of emissions, governed by a clear and reliable schedule. This is not the rule elsewhere, including in Europe.
Substitute for Germany
Indirectly, France also benefits from budgetary rigor across the Rhine. “The German debt issuance program, reduced in 2024 after the decision of the Constitutional Council of Karlsruhe forcing the country to reduce its budget, should be insufficient to meet demand, underlines Amine Tazi, economist formerly with the services of Bercy, today consultant. On the sovereign debt market in the euro zone, this should benefit French government bonds. Their risk/return profile makes them the best substitute as a ‘risk-free’ asset.
To highlight its strengths, France can count on a very effective VRP: the Agence France Trésor (AFT). “Its job is to manage the State’s cash and debt in a safe manner and in the best market conditions. In other words, we could say that it must sell French sovereign bonds at the most expensive price for investors and at the lowest cost for taxpayers”, summarizes Amine Tazi, former chief economist of this agency, attached to the Ministry of the Economy, and who also manages the relationship with the rating agencies. Its representatives spend “a lot of time traveling around the world in Asia, the United States, the Gulf to talk to investors, explain to them the reforms, the issuance strategy”, greets Benjamin de Forton, head of sovereign debt at BNP Paribas, intermediary between debt buyers and AFT. To best meet demand, the agency relies on banking partners, called “Treasury value specialists”.
These SVTs – for those in the know – are fifteen in number, among which, in addition to BNP Paribas, we find Société Générale, Crédit Agricole but also JP Morgan and HSBC. They provide their recommendations on the volumes to issue and the maturities to favor, purchase the securities and place them with their investor clients. Last February, Benjamin de Forton participated in a 30-year French bond issue. “Demand was more than 9 times higher than demand, and 91% made up of foreign investors, proof of an extremely strong appetite,” he assures.
The downgrade announced by S&P will not change the situation. BNP Paribas experts have no concerns whatsoever. “In the eyes of insurance companies, French debt remains a risk-free asset. For managers who follow a benchmark, this transition does not trigger exits: there will be no forced sales. What matters is that the average rating of large agencies remains between AA and AA-, explains Jean-Christophe Machado. Even if France moved to A, this could have an impact on certain foreign investors, such as central banks, or on certain mandates, but the. hearts of French investors would not be affected. A downgrade under BBB- would be a completely different story. We are still very far from it.