France on a budget

September 25, 2013

The French 2014 budget will be presented in full today with the government seeking to reassure voters with a plan that makes the bulk of savings through curbs in spending, having relied more heavily on tax increases so far.

The government has already said it expects 2014 growth to come in at a modest 0.9 percent, cutting its previous 1.2 percent prediction, and that after a 2013 which is likely to boast hardly any growth at all.

As a result, the budget deficit is expected to push up to a revised 3.6 percent of GDP from 2.9 next year. That puts Paris in line with IMF and European Commission forecasts but what Brussels thinks about the plan as a whole is another matter.

About 18 billion euros of savings for 2014 will be detailed with the bulk – about 15 billion – coming from spending cuts. Economists are already saying the new target to bring the deficit below 3 percent in 2015 could be difficult considering France’s decades-old struggles with cutting public spending.

Furthermore, EU officials are quietly expressing disappointment at the modest nature of French pension reforms, and it now seems the reforms will put a further burden on the public purse in the long run. The aim was to wipe out a pension deficit expected to reach 20.7 billion euros by 2020 if nothing is done, but government documents sent to lawmakers indicate the deficit for public-sector workers’ pensions would fall by only 800 million euros under Francois Hollande’s plan.

Today sees a host of European Central Bank speakers, including Slovenia’s central bank governor who is attending the Reuters Central and Eastern European Summit. German heavyweights Joerg Asmussen and Jens Weidmann speak later in the day, as does Ireland’s central bank chief.

ECB boss Mario Draghi hardened expectations on Monday that the central bank could throw more long-term liquidity at the banks – maybe with an even longer payback period than last year’s three-year, trillion-euro-plus LTRO – if money market rates keep climbing. Subsequent utterings from his colleagues have been mixed on that issue but one presumes Draghi must be taken at his word that the ECB will act to curtail de facto policy tightening on the markets if necessary.

The rule of thumb is that if “excess liquidity” in the money market – which is shrinking quite fast now as banks repay last year’s LTRO offerings – drops much below 150 billion euros, then market rates are likely to be squeezed higher. Excess liquidity at the last count was 219 billion euros and falling by several billion a week. That means the ECB may have to act quite quickly and, as Draghi hinted at the last policy meeting, it could require an interest rate cut to rectify.

Italy sells a range of debt on Wednesday, Thursday and Friday although, conveniently, the debt agency chief has revealed the existence of an up to 5.5 billion euros sinking fund to repay debt at maturity or buy it back early. Today, Rome is selling zero coupon and inflation-linked bonds.

Silvio Berlusconi has taken Italy’s political crisis off boiling point by shelving any threat to pull down Italy’s coalition government for now but he is also demanding taxes be cut despite growing pressure on the country’s public finances. Prime Minister Enrico Letta’s government is expected to enact a delayed increase in value-added tax next month. One of Berlusconi’s allies has already said the coalition could fall if it does. So we’re not out of the woods yet and there is still the imponderable of how Berlusconi will react if and when he is barred from parliament for his tax fraud conviction.

Even if the situation is resolved relatively amicably, Italy has a mountainous funding requirement. Its gross debt issuance has risen to 470 billion euros this year from the planned 450 billion, according to the debt agency, and will be pretty much the same next year. So far the Treasury has sold around 363 billion euros in debt this year. 2015 could be just as tough with heavy redemptions falling due.

The Bank of England’s new risk watchdog – the Financial Policy Committee – will release minutes of its latest meeting. One of its central tasks will be to head off any housing bubble in the UK. Latest data showed house prices rising more than three percent annually across the country and by nearly 10 percent in London. The government insists there is no problem and is pressing ahead with its “help to buy” scheme which could inflate the market further. Could the new body raise a warning flag about government policy? Probably not at this juncture but it’s one to watch.

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