“Sonnez l’alarme – II”

Plus ça change…

The key chart

Trends in net lending/net borrowing, EURbn, rolling 4Q sum (Source: ECB)

The key message

Comments made by the Governor of the Banque de France in Paris last week (1) confirm that conventional macro thinking continues to (largely) ignore private debt while seeing public debt as a problem, and (2) suggests that reports of the death of out-dated fiscal rules in the euro area (EA) are premature.

What did he say? The Governor rejected arguments that (1) accommodative monetary policy was responsible for the rise in public debt, and (2) that “because of this high public debt, monetary policy is now unable to raise interest rates sufficiently to combat inflation”. He stressed that central bank independence was “notably designed to prevent any risk of fiscal domination.” The rest of the speech focused on why debt must remain a key issue and the future EA fiscal rules.

From a CMMP analysis perspective, there were three extraordinary features of the speech:

  • First, in discussing the exceptional (fiscal) response to exceptional circumstances, the Governor ignored the similarly exceptional disinvestment by the French private sector;
  • Second, and linked to this, he suggested that France “could keep the 3% deficit target, which is as a “useful anchor” and even the 60% debt target”;
  • Finally, he chose not to refer to the elevated risks associated with the level, growth or affordability of risks associated with French private sector debt, particularly in the corporate (NFC) sector..

Why does this matter? The Governor’s speech follows similar arguments presented earlier this year by the French state auditor. In both cases, the level of public sector debt was viewed as a problem but private sector debt was ignored, confirming a fundamental flaw in conventional macro thinking. The support for out-dated and arbitrarily determined fiscal rules also means that the risks of deficit reductions compounding further private sector deleveraging in the future remain.

Plus ça change, plus c’est la même chose…

Sonnez l’alarme II – the charts that matter

Trends in French public sector net borrowing (EURbn) since 1999 (Source: ECB)
Trends in French and German government debt ratios (% GDP) versus fiscal target (Source: BIS)
Trends in French private sector net lending (EURbn) since 1999 (Source: ECB)
The view from a sector balances perspective (Source: ECB)
Breakdown (% total) of French credit to the non-financial sector (Source: BIS)
Rolling 3-year CAGR in NFC credit versus 3-year CAGR in nominal GDP (Source: BIS)
French NFC sector debt ratio versus BIS maximim threshold limit (Source: BIS)
French NFC debt service ratio versus LT average since 1999 (Source: BIS)
EA private and public sector balances, EURbn (Source: ECB)

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.