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France’s debt pile is surprisingly high — but experts aren’t worried

A French Tricolor flag hands from the Arc de Triomphe.

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LONDON — Unlike other euro nations, France doesn’t have any plans to significantly reduce its public debt in the near future.

But market watchers and economists don’t seem bothered.

The second largest euro area economy predicts that its public debt ratio is likely to stand at 117.8% in 2021, and to fall only slightly to 116.3% in 2022. Estimates from Goldman Sachs suggest the French debt pile will remain at the same levels until at least 2024.

“France stands out as the only large euro area country where we, and external forecasters, do not project a significant reduction in the debt-to-GDP ratio by the end of our forecast horizon,” analysts at the investment bank said in a note in April.

“We expect French government debt of 116% in 2024, down only slightly from 2020 levels, while we look for a notable decline in Germany, from 71% to 68% and Italy from 156% to 151%,” they added.

France has long struggled with high levels of debt and the pandemic has naturally made the situation worse. Its long history of debt is one of the reasons why economists believe there won’t be a massive improvement in the coming years.

France has not seen a “consistent debt decline in decades,” Sarah Carlson, senior vice president at Moody’s, told CNBC on Tuesday.

Data collected by the International Monetary Fund shows France’s debt growing since 2010, when it stood at about 85% — above the EU’s recommended threshold of below 60% of debt to GDP (gross domestic product).

Jessica Hinds, economist at Capital Economics, said there are two main reasons why France has posted high levels of debt: It runs persistent primary budget deficits and its sluggish economic growth has made it harder for the government to reduce the debt burden.

“Over 2010 to 2019 as a whole, France’s borrowing costs have on average been a touch lower than nominal GDP growth between 2010 to 2019. But the persistent primary budget deficit (government borrowing) has meant that despite this the debt ratio has not fallen, it has merely stabilised at a high level,” she said.

In addition, Goldman Sachs also said that its research “has shown that over history French fiscal policy has tended to respond less to rising debt than other major euro area countries.”

This is likely to remain the case as the country gears up for a new presidential election next year and as the country keeps fighting the Covid-induced crisis.

At this stage, I would be more worried about a premature return to austerity.

Jessica Hinds

economist at Capital Economics

“We do not expect France to adopt a new fiscal rule until after next year’s elections, as we think President Macron is unlikely to push through a fiscal consolidation agenda ahead of the election,” Goldman Sachs said.

But ultimately analysts think it doesn’t make a huge difference that France is not focused on tackling its debt for now. This is because interest rates are low and fiscal stimulus is needed to address the economic crisis.

“At this stage, I would be more worried about a premature return to austerity that could hold back the economic recovery rather than a slow reduction in the debt burden,” Jessica Hinds, economist at Capital Economics, told CNBC via email.

Carlson from Moody’s, also said that “what matters is debt affordability” — the ratio of annual interest payments to keep a government’s debt to its annual tax revenues. And she added that France is able to finance itself at cheaper prices now than back in 2015.

The yield on the 10-year French government bond is currently trading at about 0.153% versus 1.2% at its 2015-peak.

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