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Sunday, 22 October 2017

Lending a helping hand

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French state agency Caisse d’Amortissement de la Dette Sociale was set up with a limited lifespan and is confident of fulfilling its programme of taking debt off official balance sheets before its term comes to an end in 2025.

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Some state-owned agencies at heart seem little more than a neat way for indebted sovereigns to move unwanted debt off their official balance sheets. CADES would agree. Its sole aim is to reduce public debt.

But the French body’s activities are more than financial fudge. The debt transferred to it is not simply cleansed straight away. CADES has to issue its own instruments across varying maturities effectively to pay off the social security-related liabilities it takes on.

The debts of CADES itself still count in France’s official debt calculations too, but the agency’s sophisticated measures have helped cut the country’s debt mountain by €84bn since its formation in 1996, saving a total of €20bn in interest payments.

Overall, CADES reckons that its existence means France’s debt is 5 percentage points lower, as a proportion of GDP, than it would have been if it had not been formed 18 years ago as a temporary debt amortisation board.

At the end of 2013, France’s total public debt still stood at 93% of its GDP. Until June 2012, those levels, above the 60% target set by Brussels, would have appeared especially alarming. But by pledging that month “to do whatever it takes”, Mario Draghi defused the eurozone crisis.

Since then, yields on European government bonds have fallen, easing their associated agencies’ funding too. None has benefited more than CADES, which relies on ring-fenced taxes committed by the state to pay the interest on its bonds and for their redemptions.

Quick start

“This year has been quite good for us,” said Patrice Ract Madoux, chairman of CADES. “We started fast and have now issued two of our largest bonds ever: a five-year issue of €5bn, our largest ever in euros, and a three-year US$5bn note, our largest dollar bond.”

Those two issues alone, with the 1.125% dollar bond launched in January and the euro transaction in February, have helped the agency complete nearly two-thirds of its expected funding by the end of the first quarter. Another dollar issue – a 10-year raising US$3bn at 3.375% – in mid-March also helped.

Ract Madoux attributed the success to investors returning to European state credits now that the crisis has calmed down. “There has been strong demand from central banks around the world and most especially in Asia, where 50% of the bonds have been sold. It used to be that a third were sold there,” he said.

“Asian investors and central banks are feeling that Europe is in better shape than before and they are reshuffling portfolios from US dollars to euros. That may explain why they are buying large amounts this year,” he added. “The planned end of US quantitative easing is also a possible explanation.”

CADES was astute in completing as much of its programme as possible in the first quarter. The second quarter of the year was always likely to be less busy as investors awaited the outcome of the European parliamentary elections in May.

These resulted in President Francois Hollande’s government being beaten into third place with just 14% of the vote. The far right Front National topped the poll with 25% of the vote – the first time it had come first in a national election.

However, Ract Madoux says that while not welcome, this result was not necessarily unexpected by the market by the time it was delivered. Investors seemed remarkably resilient and were barely unsettled at all.

“There have been no significant movements in spreads since the European election results. They  had been anticipated by the market,” he said. “Where France is concerned, the elections saw a third of seats going to a new party but the situation is not concerning since the party has no representation in the French parliament and only has 25 out of 750 seats in the European parliament.”

He also pointed out that France would continue to comply with the European fiscal compact measures to reduce public deficits and debts across the Continent.

“This [result] won’t change things. There have been statements by the Prime Minister and President saying that things won’t change regarding the economic reforms and measures that have already been proposed to parliament,” he said.

“Looking at the economic behaviour of Europe, things are improving and the economy is in a better shape, even if recovery in France is slower than elsewhere.”

CADES will now focus on completing its borrowing programme for this year, with between €15bn and €18bn earmarked in total for 2014. Ract Madoux is relaxed. “Having done large amounts before the summer we are ahead of the programme,” he said.

In terms of specific issuance to come, he added: “It’s not decided yet but we could issue another long bond by the end of the year. And we have said we would issue some inflation-linked bonds, which is not so easy to do when there is the threat of deflation.”

CADES is helped in this regard, he explained, because of demand for inflation-linked paper in France from retail investors. One slight difficulty that CADES faces is that it has a limited lifetime until 2025, meaning it can only do bonds of a 10-year maximum tenor. Not all will be jumbos either.

Ract Madoux said he was confident of completing the programme as planned. “We have had lots of demand. We got €7bn of orders where normally it would have been €2bn to €3bn so we issued €5bn, which is bigger than usual,” he said.

 

 

 

 

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