There are similarities between French and Italian public debt. The narrative that drives the financial world is that Italy is an highly indebted country at the mercy of the markets, while France sits on the dashboard with Germany in the European Union, despite having a much less solid public balance sheet. But if the numbers tell a different story,
French debt in foreign hands
As a percentage of GDP, French debt stands at 110.60 percent at the end of 2023, compared to Italy’s 137.3 percent. There is no doubt that our debt is higher. In absolute figures: 3.101 versus 2.863 billion. But we should not limit ourselves to the debt ratio to assess the degree of sovereign risk. Also, at the end of last year, foreign investors held about 1.6 trillion euros of French debt (1.597 billion, to be precise) compared to 789 billion in Italy. In practice, 51 percent of Parisian debt is in the hands of non-residents, compared to 27.6 percent in Italy
Risk of foreign capital flight
These figures are almost always, if not always, interpreted in favor of the solidity of French debt. As they are perceived as low-risk, foreign investors are willing to finance them. The fact that even Italian debt was more than half in the hands of foreign investors in 2010, shortly before the spread crisis broke out, shows that this can indeed be the case. Since then, their share has fallen. However, this undisputed strength could become a weakness in the event of a shock. Just think of these days. There are fears on the markets that the right-wing left will win the early elections in France at the end of June. Yields are rising again and the spread is widening but remains limited. What would happen if the feared scenario were to become reality? Foreign capital would leave Paris as quickly as it left Rome over a dozen years ago. Suddenly, France would have to refinance more than half of its debt and would have no certainty about relative demand.
Vulnerabilities for Paris
For foreign investors as a whole, French debt makes up only a tiny percentage of their portfolios. Conversely, it would be very complicated in the short term for domestic investors to replace the former in order to finance their own government. The operation would take years and require a major repositioning of domestic portfolios. Italy is now explicitly pursuing this strategy to loosen its dependence on foreign capital, which is proving more volatile than domestic capital for several reasons. The plan is working, not least because we already assumed very high BTp holdings in the hands of Italian institutional investors. Another fact casts doubt on the solidity of French bonds, as suggested by the media and the markets. France had a structural primary deficit before COVID-19, while Italy had a structural primary surplus. This means that the former regularly spent more than it took in, minus interest. We have been spending less since the early 1990s, although the interest burden has always weighed on public budgets during these decades.
French debt overvalued by rating agencies
Finally, France had a negative net international investment position of 29.40 of GDP as at December 31, 2023. Italy had a positive value of 7.40 percent. This means that the Italian system holds more assets abroad than foreigners hold in our country. The situation is different in France, where nationals do not have sufficient funds to replace foreign capital in the financing of French debt if necessary. This is why, for example, Japanese debt is considered very solid, even though it is 265 of GDP. The Land of the Rising Sun has a positive net external position of 80 percent of GDP. The fact is that French debt is rated very highly and, frankly, very generously by the rating agencies: AA-/AA-/Aa2 versus BBB/BBB/Baa3.
Who knows, maybe sooner or later reality will prevail over prejudice.
