The key chart
Top ten BIS reporting nations ranked by outstanding stock of PS debt ($tr) (Source: BIS; CMMP)
The key message
France provides an excellent case study for improving our understanding of global debt dynamics and their impact on economic activity and banking sector risks.
When analysing debt dynamics, policy makers and macroeconomists are vulnerable to three types of mistakes:
- Mistake #1: ignoring private sector (PS) debt entirely
- Mistake #2: focusing exclusively on the absolute level of PS debt
- Mistake #3: failing to incorporate the “structure” of debt into their analysis
Current French debt dynamics illustrate the impact of these mistakes in practice and highlight why a more multi-faceted, analytical approach is required.
Attention typically focuses on France’s above EU-average level of public debt and Economy Minister, Bruno Le Maire’s attempts to convince markets and Brussels that France is “going back to budget discipline” (see today’s 2024 budget announcement for details).
Note, however, that France also has the fourth highest outstanding stock of PS debt in the world ($6.6tr) and the highest outstanding stock among euro area (EA) nations. The risk here is that potential PS debt vulnerabilities are either ignored or under-played. Consider three additional factors:
- the level of PS indebtedness: France has the highest level of PS indebtedness (226% GDP) among EA economies (excluding Luxembourg)
- the rate of excess credit growth: France has recorded the highest levels of excess PS credit growth among larger EA economies since mid-2015
- affordability risks: France’s PS debt service ratio is high in absolute terms and in relation to its LT average
Each of these factors point to elevated PS debt vulnerabilities in France, but they do not tell the whole story.
The transmission mechanism of ECB monetary policy to the French economy is relatively slow. The increase in the cost of borrowing for French corporates has been lower than in the rest of the EA and the current cost of borrowing for both corporates and households is lower than the EA average too. This reflects unique, structural factors of French financial markets (bias towards fixed rate lending, maturity of NFC debt, maximum debt-service-to-income ratios etc). These factors do not eliminate France’s PS debt vulnerabilities, but they do limit their impact, at least in the short term.
In short the key message here – illustrated clearly by French debt dynamics – is that not only does private sector debt matter, but also that it needs to be considered in relation to the level of indebtedness, its rate of growth, its affordability AND its structure.
Structure matters too
The context
Top ten BIS reporting nations ranked by outstanding stock of PS debt ($tr) (Source: BIS; CMMP)
France has the fourth highest outstanding stock of private sector debt ($6.6tr) among BIS reporting nations and the highest outstanding stock among EA economies (see graph above).
While France’s share of total global PS debt has fallen slightly from 3.8% in 1Q09 to 3.3% in 1Q23, its share of euro area (EA) debt has increased from 21.7% to a new high of 28.4% over the same period (see graph below).
Trends in market share of EA private sector debt (Source: BIS; CMMP)
Improving our understanding of PS debt dynamics
Three factors point to elevated PS debt vulnerabilities in France – the level of indebtedness, the rate of “excess credit growth”, and affordability risks.
The level of indebtedness
Trends in private sector debt ratios (% GDP) (Source: BIS; CMMP)
France has the highest level of PS indebtedness among EA economies (excluding Luxembourg). The PS debt ratio has risen from 145% GDP in 1Q03 (109% NFC, 36% HH) to 226% GDP in 1Q23 (160% NFC, 66% HH). The PS debt ratio has fallen from its 4Q20 peak of 241% GDP but has exceeded the Netherlands’ PS debt ratio for the past two quarters (see chart above).
Excess credit growth
Trends in private sector debt “relative growth factors” (Source: BIS; CMMP)
France has also recorded the highest levels of excess PS credit growth among larger EA economies. Since mid-2015, France’s “relative growth factor” (RGF) of private sector credit has been the highest among the larger EA economies. The RGF measures the CAGR in PS debt versus the CAGR in nominal GDP, calculated on a rolling 3-year basis. The contrast between France’s excess credit growth and the trends in the Netherlands, Italy and Spain pre-COVID are marked (see chart above).
Affordability risks
Global affordability risks – deviation of DSR from LT average plotted against current DSR level (Source: BIS; CMMP)
The PS debt ratio is also high in absolute terms and in relation to its LT average, suggesting elevated “affordability risks” (see chart above). At the end of 1Q23, France’s PS debt service ratio was 20.5%. This was down from its 4Q20 peak of 21.5% but remains high in absolute terms and 2.7ppt above its average level since 1999.
Structure matters too
Change in cost of NFC borrowing since June 2022 plotted against current cost of NFC borrowing (July 2023) (Source: ECB; CMMP)
The transmission of ECB monetary policy to the French economy is relatively slow, however, offsetting the vulnerabilities described above. The increase in the cost of borrowing for French corporates (NFCs) has been lower than in the rest of the EA (see chart above) and the current cost of borrowing for both NFCs and households (HHs) is lower than the EA average too (see chart below).
Cost of French and EA borrowing for NFCs and HHs as of July 2023 (Source: ECB; CMMP)
These trends reflect unique structural characteristics of the French market including relative exposure to fixed-, as opposed to variable-rate, lending and the maturity of debt.
Only 41% of new loans to HHs and NFCs in France are variable rate loans compared with an average of 66% across the EA. More noticeably, less than 3% of new mortgage loans in France are variable rate compared with an average of just over 20% for the EA.
According to the Banque de France, the debt of French NFCs also remains focused on long maturities (55% of outstanding bank loans and 43% of market debt have residual maturities of 5 years or more). The average interest rate in outstanding debt is therefore increasingly gradually and remains considerably lower than the cost of new borrowing – good news for borrowers, less positive for banks’ NIMs.
Conclusion
Policy makers and economists typically obsess about public sector debt while largely ignoring PS debt (mistake #1). When attention is given to PS debt, this typically focuses on its absolute level alone (mistake #2).
Incorporating the level of indebtedness, the rate of growth and the affordability of debt improves our understanding of PS debt dynamics and their potential impact on the economy considerably. However, as this French case study shows, it is an error to ignore the structure of debt too (potential mistake #3).
The level of PS indebtedness, the rate of excess PS credit growth and the affordability of PS debt all point to elevated PS vulnerabilities in France. The structure of French PS debt limits the impact of these vulnerabilities due the relatively slow transmission of ECB monetary policy, however, at least in the short term.
In summary, structure matters too…
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.