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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°141 ▪ 12th April 2018


France should exit from the excessive deficit procedure in May!

On Monday the 26th of March, the National Institute of Statistics and Economic Studies (Insee) published its first estimate of the French public deficit for 2017. It amounted to 59.3 billion euros, or 2.6% of GDP after 3.4% in 2016, bringing French gross public debt to 97.0% of GDP. This figure is therefore much better than the 2.9% previously announced by the government, particularly to the European Commission. For the first time since 2008, this figure falls below the 3% public deficit ceiling imposed by the legislation of the European Union (EU) Stability and Growth Pact (SGP). Since 2009, France has been under an excessive deficit procedure. This procedure obliges the Eurozone Member States to report more frequently to the European Commission. Here we will focus on this excessive deficit procedure to understand the ins and outs of the French case.

This ceiling of 3% of GDP was established on the basis of a double statement. Before the creation of the Economic and Monetary Union (EMU), when a single country led an expansionary fiscal policy, the potential disadvantages lied with it alone, while its partners mainly benefited (public expenditure to boost domestic demand was reflected in higher exports from its main trading partners). This is no longer necessarily the case in the Eurozone. Indeed, a country that alone leads a fiscal stimulus shares the effects with all members of the Eurozone, including the adverse effects: inflationary pressures, rising interest rates, appreciation of the exchange rate of the euro. The existence of these negative externalities justifies a strong coordination of fiscal policies or, failing that, the adoption of minimum rules to regulate fiscal policies, such as the obligation to maintain a public deficit of less than 3% of GDP. In addition, it is very difficult to set rules that directly affect the public debt to GDP ratio, as the evolution of this ratio depends on many factors and the initial situations of the euro area countries remained too heterogeneous despite convergence efforts. On the other hand, the respect of a constraint on the public deficit indirectly makes it possible to contain the evolution of the public debts, at least to ensure a stable trajectory on a given horizon.

France will therefore have to show efforts to the European Commission until 2019 to fall off the radar of the Commission. To do this, the forecasts of the French and European statistics institutes have to be in line with the constraints that stem from the EU PSC. In this regard, Bercy has revised its forecast of public deficit downward to 2.3% of GDP in 2018 and 2.4% in 2019, instead of 2.8% and 2.9% hitherto indicated. The European authorities will decide in May on the fate of France regarding the exit of the excessive deficit procedure. The European Commissioner for Economic and Financial Affairs, Pierre Moscovici, recalls that “the level of public spending” in French GDP is one of the highest in the world. “We are the only country where we still honor the 3%. It’s not a target, it’s an absolute limit! Our partners are 0.9% and probably a little less in 2018…”.

The positive momentum of growth has benefited France. Actually, when the economic growth improves, the government’s revenues, particularly the compulsory levies (taxes and contributions), increase much faster than the activity. In the details of the accounts, we can read that between 2016 and 2017, public expenditure increased by 2.5%, i.e., an additional 30 billion euros. But, at the same time, revenues jumped 4%, or 47 billion euros. This rise pushes the tax rate to a level never before reached of 45.4% of GDP, the second highest rate of all OECD countries, the first being Denmark with about 45.9% in 2016. However, the continuation of the implementation of structural reforms in France will not be easy. The negotiations will be difficult, and nobody will escape the concessions, neither the government nor the unions. Without national reforms, European ambitions could be slowed down again.

Julien Moussavi, Head of Economic Research



Sovereign Risk

About the lack of Monetary and fiscal path in Developed countries: be aware of the next crisis!

Central bank key interest rates (in %) and Primary balances (% of GDP)

International organizations, analysts, and media all seem to be unanimously optimistic about world economic perspective in 2018 and 2019. However, as professor J. Bradford DeLong from Berkeley hinted in a recent article, 11 years have passed since the last crisis, leading to one of the longer consecutive growth episode since the WWII. According to the economic cycle, it is a question of time before a new crisis hits us. However, despite a slow but existent economic rebound, developed economies have not restored their monetary and fiscal path, in order to be able to react to this coming crisis (see the graph below). This is worrying.

However, this lack of fiscal and monetary path seems to be rational, as we observed a persistently low inflation and low economic growth despite the economic rebound after the global financial crisis.

Despite this rationality, the lack of path for developed countries could annihilate their capacity to answer to the next crisis, and undermine their future recovery.

Sources: Beyond Ratings, IMF, Datastream


From which part of the world will come the next crisis?

Fragile States Index (May 2017)

The Fragile States Index (FSI) assesses 178 countries based on twelve social, economic, and political indicators that quantify pressures experienced by countries, and thus their susceptibility to instability. The global analysis is based on the Conflict Assessment System Tool (CAST) framework designed by the Fund for Peace that gathers quantitative data and qualitative information from various sources.  Unsurprisingly, most of sub-Saharan (South-Sudan, Somalia, Central Republic Republic…). and middle-east (Yemen, Syria…) countries are considered highly risky and unstable. The usual Nordic suspects (Finland, Norway, Denmark, Sweden…) are also in their place at the top of the ranking.

More interestingly, however, is that among the 10 countries whose susceptibility to insecurity worsened the most between 2016 and 2017, are 8 developed (Turkey, Japan, Italy, South Korea, Belgium) or developing countries (Mexico, Brazil, South Africa). This hides different threats that depend on local specificities. For example, Italy’s score is mainly impacted by the arrival of refugees, Turkey is facing a deterioration of its global cohesion and Brazil is suffering of a weakening of public authority and effectiveness. In this situation, it is quite difficult to forecast where the next future crisis could come from.

Sources: Beyond Ratings, The Fund for Peace

Carbon/Climate Change

Are the SDS attainable?

Cumulative Capital Expenditure in Oil and Gas Extraction, 2018-40, in IEA Scenarios Compared to Paris Goals

Working on energy forecasts, the International Energy Agency (IEA) provides a “New Policy Scenario” (NPS) that are used as a roadmap by governments. On the other hand, the IEA provides a “Sustainable Development Scenario” (SDS) which aims to describe a pathway consistent with the goal of the Paris Climate Agreement.

As this graph demonstrates, the NPS implies burning an amount of fossil fuels that would exhaust the carbon budget for the 1.5°C target by 2022, and for a 2°C limit by 2034. We can also see that the SDS does not match the Paris Agreement goals of keeping warming @below 2°C and aiming for 1.5°C. Indeed, emissions under the SDS still exhaust the 1.5°C carbon budget by 2023 and that for 2°C by 2040.

Note: NPS (New Policies Scenario): Governments implement (most of) the policies they have already announced, and no more (the main scenario in the World Energy Outlook) / SDS (Sustainable Development Scenario): Governments implement policies sufficient to achieve Sustainable Development Goals on climate, energy access, and air pollution, though not to achieve the Paris goals of 1.5°C or well below 2°C (1 of 2 secondary WEO scenarios since 2017).

Sources: Oil Change International analysis, IEEFA


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