High French public debt & political risks
A snap election seems likely to lead to a marked deterioration in an already difficult fiscal outlook for France.
The charts below show public debt in France over the very long run, compared with the USA, which has poor debt dynamics ahead of the critical presidential election in November, and Italy and Greece, the only two countries in the euro area with larger public debt burdens than France.
The IMF forecasts France’s public debt will increase from about 110% of GDP at present to around 115% over the next five years.
Public-sector forecasts are notoriously imprecise, but debt at that level would be a little higher than the peak reached during COVID, representing the highest ex-World War debt since the late 1800s, back when debt had rapidly expanded to fund the Franco-Prussian war and public works.
In terms of the French elections, where the first round of voting is on 29-30 June and the second round is on 6-7 July, the Institut Montaigne analysis of proposed spending policies from the various parties shows most of them aim to help low-income households with the cost of living.
Policy costings are also highly imprecise because of the limited detail on several of the proposals, where parties can also change their minds once in power.
However, the Institut’s analysis shows that current party platforms have expensive policies that would immediately add to the budget deficit, ranging between freezing many consumer prices (c.1% of GDP per annum), reindexing government pensions to inflation (c.½% of GDP per annum), and reducing the value-added tax rate (c.½% of GDP per annum).
The recent Italian experience shows that more extreme politicians can temper their plans once in government, but the base case seems to be adding to an already difficult fiscal outlook, including the potential unwinding of reforms to welfare payments, which explains the recent sharp increase in the premium of French over German debt.
Analysis suggests that a sustained increase in the risk premium for French debt will lead to lower French share prices, place downward pressure on short-term interest rates, and encourage demand to switch to UK bonds.
While increased public spending can add to growth in the near term, cross-country studies (weakly) suggest that debt levels of more than 100% of GDP end up being a drag on activity.
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
........
Investment Disclaimer
Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting www.coolabahcapital.com. Neither Coolabah Capital Investments Pty Ltd, Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Investments (Retail) Pty Limited (CCIR) (ACN 153 555 867) is an authorised representative (#000414337) of Coolabah Capital Institutional Investments Pty Ltd (CCII) (AFSL 482238). Both CCIR and CCII are wholly owned subsidiaries of Coolabah Capital Investments Pty Ltd. Equity Trustees Ltd (AFSL 240975) is the Responsible Entity for these funds. Equity Trustees Ltd is a subsidiary of EQT Holdings Limited (ACN 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT).
Forward-Looking Disclaimer
This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.
5 topics
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Comments
Comments
Sign In or Join Free to comment