Saturday, July 20, 2024

Because the French public debt is more dangerous than the Italian debt in some respects


Paris and Rome, cousins ​​who are not always on excellent terms, but are forced to remain on good terms for family reasons. Many believe that the recurring political, trade, financial and sporting tensions between the two countries stem from the fact that we are similar and often find ourselves active on the same battlefields. However, little has so far highlighted the similarities between French public debt And Italian. The narrative that dominates the world is that Italy is heavily indebted and at the mercy of markets, while France holds the EU leadership with Germany, even though its public finances are far less solid.

What if the numbers tell a different story than the ones we’re used to reading?

French debts in foreign hands

Regarding GDP, French debt reached 110.60% at the end of 2023, compared to 137.3% for Italy. There is no doubt that we have the highest. In absolute terms, 3,101 versus 2,863 billion. But we should not limit ourselves to the debt-to-GDP ratio to assess the degree of this Sovereign risks. And at the end of last year as well Foreign investors They held around €1,600 billion of French debt (1,597 billion to be exact) compared to Italy’s €789 billion. In practice, 51% of Paris’s debt was in the hands of non-residents compared to 27.6% for Italy.

The risk of foreign capital flight

These statements are almost always, if not always, interpreted in favor of the solidity of the French debt. Since it is seen as low risk, foreign investors are willing to finance it. That things could really be this way can be revealed by the fact that more than half of Italy’s debt was also in the hands of foreign investors in 2010, shortly before the Italian economy exploded. The spread of the crisis. Since then, their share has declined.

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But this undoubted strength may turn into a weakness in the event of a shock.

Think about these very days. There is fear in the markets about that Early elections At the end of June, the Libyan right won in France. Oat yields are rising and their spread is expanding, although it remains limited. What would happen if the scary scenario became a reality? Foreign capital will leave Paris as quickly as it left Rome more than a dozen years ago. Suddenly, France will find itself forced to refinance more than half of its debt without ensuring the associated demand.

Paris’s weaknesses

For foreign investors as a whole, French debt represents a small percentage of their investment portfolios. Conversely, it will be very difficult for local investors alone in the short term to replace local investors to finance their government. The process will require years and a strong reorganization of internal portfolios. Now Italy is clearly adopting this strategy to reduce its dependence on foreign capital, which has proven to be more volatile than domestic capital for various reasons. The plan also worked because we were already starting from very high levels of BTp holdings in the hands of Italian institutions.

There are other data that would cast doubt on the strength of French debt as presented to us by the media and markets. France before Covid Basic structural deficitItaly has a structural primary surplus. This means that the former regularly spent more than he collected, without interest. We have spent less since the early 1990s, even though the weight of interests has weighed heavily on public finances in recent decades.

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French debt is overrated by rating agencies

Finally, as of December 31, 2023, France had one Net foreign investment position Negative 29.40% of GDP.

Italy boasted a positive position of 7.40%. This means that the Italian system holds more assets abroad than foreigners do in our country. The opposite situation is in France, where, if necessary, the population would not have sufficient resources to replace foreign capital in financing French debt. This is why, for example, Japanese debt is evaluated as very strong, even if it amounts to 265% of GDP. The Land of the Rising Sun has a positive net position with foreign countries equivalent to 80% of GDP. The fact remains that French debt is assessed by rating agencies with very high and, frankly, very generous ratings: AA-/AA-/Aa2 versus BBB/BBB/Baa3. Who knows, sooner or later reality will triumph over prejudice.

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