Sovereigns: France considers debt management changes

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Proposals in the French budget bill for 2006 and discussions in parliament last month could lead to significant changes in France’s public sector debt and risk management. Risk management role for AFT as Cades remains separate borrower.

Proposals in the French budget bill for 2006 and discussions in parliament last month could lead to significant changes in France’s public sector debt and risk management.

Agence France Trésor is being lined up to manage the risks incurred by government ministries, while the French parliament is discussing whether to consolidate the country’s different government-guaranteed borrowers.

AFT has discussed ways to improve risk management with various government departments, including the defence ministry. As a big fuel buyer, the ministry is exposed to oil price risk. The government also makes payments to some international organizations in dollars, so euro-dollar FX risk is relevant.

“Taking stock of what happens in the public sector, it might make sense to manage these risks and devise a hedging strategy,” says a senior figure familiar with the situation.

The budget bill proposes giving AFT a role analogous to that of a corporate treasurer. Each ministry or department will choose its hedging strategies, then mandate AFT to execute them. AFT has proposed that the French government create a segregated account where its hedging deals are registered. This would allow parliament and the French court of auditors to review AFT’s activities. It would also make collateral management easier.

“We have the budgetary tools,” says the senior figure. “We need the legislation. We are only at the beginning of the process. Other countries like New Zealand and Sweden are much more advanced than we are.”

The budget bill has been approved by the National Assembly and, at the time of writing, a final vote was due by the end of the month, so AFT could take on its new role in January. It is already working with the defence ministry on hedging oil price exposure.

Meanwhile, the Senate has been looking at how the French public sector borrows in the debt markets. Last month, it discussed the division of debt management between AFT, Cades and smaller French agencies, such as Erap, the state-owned holding company, or implicitly guaranteed Etablissements Public Industriel et Commercial (EPICs), such as Réseau Ferré de France (RFF), which owns and manages the French rail network.

Finance minister Thierry Breton successfully opposed the suggestion by senator Paul Girod that AFT should take over the refinancing of France’s social security debt from Cades so the government would no longer have to pay agency spread on Cades’s debt.

“The minister said AFT on one side and Cades on the other would continue with their separate business,” says Cades chairman Patrice Ract Madoux. “We already have strong links. [Treasury director] Xavier Musca is on my board, as is [AFT deputy CEO] Benoît Coeuré. The government preferred to keep AFT and Cades separate because Cades is financed by dedicated tax revenue, and because it is worth paying the spread for a refinancing system that works. The minister acknowledged that we have successfully amortised about A28 billion so far.”

The fate of the smaller French agencies remains uncertain. The Senate decided to wait until Michel Pébereau, chairman of BNP Paribas, produces his report into France’s total indebtedness, including pension liabilities. This should appear by the end of 2005, before deciding what action to take.

Some observers speculate that the government will try to bring smaller borrowers under closer AFT supervision. But this would be complicated. For example, Unedic, the federation of unemployment insurance institutions, is managed by a combination of its business owners and trade unions. “It isn’t obvious how you would move Unedic back into the pure public debt arena,” says Ract Madoux. “There has to be lots of discussion before a decision is taken.”