Negative-Interest Rate Champion Bank of France Now Frets About Ballooning Corporate Debt

Central-Bank Forked-Tongue Syndrome.

By Nick Corbishley, for WOLF STREET:

All over the world, corporations have taken on huge piles of fresh debt to try to weather the crisis. Many of those companies — after years of interest rate repression that encouraged them to borrow — were already heavily indebted before the crisis began. This is particularly true of France, where corporate debt was growing at an annualized rate of 5.8% in February, before the virus crisis began, according to the Bank of France. In March, the rate of growth jumped to 7.1%. It then surged to 9.9 % in April.

Much of this new debt issued during the pandemic is guaranteed by the French state — to the tune of 70-80% in the case of large companies. Thanks to this support, as well as the ECB’s negative interest rate policy, corporate bond buying programs, and countless other interventions, that debt comes at minimal cost for most corporations.

The interest rates on French banks’ corporate loans averaged just 1% in April — the lowest level since 2003, according to French financial daily Les Echos. The yields on the bonds issued by French firms in April averaged 1.58%, significantly higher than the record low of 0.48% registered in August 2019 but a marked improvement on the 1.99% registered in March, when bond yields were soaring.

While debt is still relatively cheap for large French firms, despite the bleak economic panorama, the risks facing excessively leveraged companies are mounting, Bank of France (BdF) warned in its biannual financial risk report.

“The increase in corporate debt could hurt many (firms’) solvency and this risk could be made worse if the recovery is weak and their ratings deteriorate,” the central bank said. “A sharp increase in corporate bankruptcies could in turn increase banks’ non-performing loans, slowing the flow of credit necessary for the economic recovery.”

Unlike many of their European peers, which have deleveraged somewhat since the 2008 financial crisis, French firms’ debt obligations have kept growing, reaching €1.8 trillion in April, according to BdF. That’s the equivalent of around 70% of France’s 2019 GDP — almost 10 percentage points above the EU average and significantly higher than the corresponding debt piles of non-financial corporations from Germany (41% of GDP), Italy (63%) and Spain (61%).

This debt measure is narrowly defined: commercial paper (short-term bonds), regular bonds, and loans from banks. These banks are “resident credit institutions,” meaning they are entities based in France, including the French subsidiaries of foreign banks. It does not include many other types of business debts, including debts by smaller businesses and loans issued by non-bank lenders such as PE firms and insurance companies.

By a different and much broader measure, the BIS ranks France sixth globally for the size of its corporate debt pile, which was equivalent to 154% of GDP at the end of 2019. The only countries with more corporate debt than France are the Netherlands (158% of GDP), Sweden (166%), Ireland (189%), Hong Kong SAR (225%), and Luxembourg (326%). All of these countries, with the exception of Sweden, are either global financial centers (Hong Kong) or corporate tax avoidance havens (Ireland, the Netherlands and Luxembourg).

Like many central banks in Europe, BdF has made a habit of periodically warning about the risks it itself has helped to create through its support of the ECB’s QE programs and interest rate repression, while simultaneously arguing for the expansion of said QE programs and interest rate repression. In a report published last November, it warned that French firms, many of them part-owned by the state, have been taking advantage of years of low or negative interest rates to take on dangerous levels of debt, much of which has been used to buy up overseas companies and assets.

Some French companies have held on to the extra funds as “dry powder” to fund capital expenditure (capex) needs, or as liquidity reserves to fend off takeover attempts. But many of them have used it to buy back their own shares or go on M&A sprees, often oversees. According to S&P, some companies did this to reduce exposure to French corporate tax, which is one of the highest in Europe. The companies essentially take on debt in France while generating the profits abroad where taxes are lower.

But French firms have also taken advantage of the euro’s reserve currency status “to engage in more risky but higher-yielding investment,” S&P said.

Many of the overseas acquisitions have taken place since 2016, when the ECB embarked on its corporate debt purchase program, which made it much cheaper for corporations to issue fresh debt. Indeed, the biggest beneficiaries of the ECB’s corporate bond buying program are French corporations, accounting for a 31% of the central bank’s purchases — compared to 24% for German firms, 11% for Italian firms and 10% for Spanish firms.

Yet many of the companies’ operating profitability has been falling for years. In a core sample of 177 large corporations, average operating profitability decreased from 11.1% to 9.8% between 2016 and 2018. And now these companies have to deal with the pandemic and its devastating impact on corporate profits. So the BdF is concerned about this excess leverage, while helping strenuously to drive it ever higher. By Nick Corbishley, for WOLF STREET.

A zombie well before the pandemic, the UK company had racked up huge debts to finance rapid growth in a sector that had started shrinking some time ago. Read… Mall Giant Intu Collapses Into Bankruptcy

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  36 comments for “Negative-Interest Rate Champion Bank of France Now Frets About Ballooning Corporate Debt

  1. DR DOOM says:

    More austerity for the French people will be the remedy. They can get by with two meals a day. Macron has declared there really is no such thing as French Culture so why not sell the ornate bridges over the Seine and empty the Louvre. Retirement is so overrated the French can easily retire at age 80 which would really be helpful to insure that corporations can keep borrowing to see if they can attain Zombie Status. More Neo-liberal applied solutions will do the trick. They have worked like a dream up to the present. Hey, by the way,those yellow vests if authenticated and still retain the smell of tear gas might have a certain cachet on E-Bay. They might go like hot cakes in the good ol’ US of A and could come in handy to boot.

    • timbers says:

      Oh come on! The zombie corps can do their fair share too….2 negative rate loans a day and no more. AND I MEAN ONLY TWO!

    • Blocked says:

      Let them all eat cake.

    • Joe Saba says:

      wow – boris got you down – so take YOUR MEDS dude

    • Xabier says:

      It would be quite wise, in fact, to begin to accustom oneself ,now, to fewer meals per day. Two IS quite enough.

      The time may soon come when many will be grateful for even that.

      All the whining belly-aching (no pun intended) since 2008 about how dreadful everything was: that decade will be looked back upon as a Golden Age.

  2. historicus says:

    Subsidize something and you get more of it…
    Central Bankers never learned this lesson…..
    and for every action, in physics and economics, there is an equal and opposite reaction…
    they never learned that either.
    Central bankers are “spinning plates”…more and more plates…

  3. 2banana says:

    Reason #355 why the uber rich and big corporations love bigger and bigger government.

    And why the wealth gaps keeps increasing.

    “some companies did this to reduce exposure to French corporate tax, which is one of the highest in Europe. The companies essentially take on debt in France while generating the profits abroad where taxes are lower.

  4. sunny129 says:

    RISK-ON behavior is encouraged directly both by Fed & CBers since 2008.

    Fed cautioned about dangerous situation in US Corp Credit mkt a year or 2 ago. DID nothing but watch. Now they are bailing out by buying Corp bonds! You bet, forked tongue!
    But no one calls on them or challenge their actions!?sunny129

    • MC01 says:

      In my memory France has been encouraging and abeting financial risks for far longer than 2008: the tacit guarantee that the State will step in should things get too hairy has been one of the defining factors of the Fifth Republic. Newspapers will just run news of a bailout in the financial news (towards the end), and they know a thing or two about it as they have been at the receiving end of generous State subsidies for decades now.

      I could write a lot about the damages wrought to the country’s business and social climate by ENA graduates (such as the present President) and what Americans and British would call “old boys’ clubs”, meaning the networks of graduates from the so-called grandes écoles, but it would get too depressing.
      The scary thing is how hated these folks are, and not just in France (ask the German partners at Airbus or the Dutch at Air France-KLM: be prepared for some coarse language) but their power remains near absolute.
      Their attitude is very similar to that displayed by that British upper class who French comedians and cartoon designers have long lampooned: they have what can only be called a patronising attitude towards the working class and visceral hatred for the middle class.
      To this they add what I can only call the typical admiration of upper class (or aspiring so) Europeans for American Democrats and their petty obsessions: Goscinny and Uderzo lampooned this tendency back in the 60’s already in Le Combat des chefs, an Asterix comic book.

      Politics in France (like in most of Europe) are kept tightly controlled under a combination of carrot and stick: that’s the reason why you won’t hear much opposition to crazy government financial policies besides the usual lip service, and why the only real opposition is the once marginal FN.
      Most ordinary people have long stopped voting altogether and are completely disgusted by politics of all hues but, and here is a big but, the old Gallic attitude of getting by through a healthy disrespect for authority (which passed into me through my mother) is being increasingly costrained: a “disrespectful” tweet can land you in troubles with the law and your ultra-ambitious New York Times-reading boss at work may decide to derail your career for having you heard commend the FN.
      If you close the relief valve you’d better prepare yourself for seeing the pressure cooker burst.

  5. Just Some Random Guy says:

    This may get out of hand. French people have to work 40 hours a week and retire at 60. The horror!!

    • CRV says:

      35 hours a week that is.

      • Just Some Random Guy says:

        No I mean they may have to increase it from 35 to 40. Mon Dieu!!

      • Engin-ear says:

        Actually it is 40 working hours per week with the gap (5h per week) converted in different social benefits like “training” and additional vacation days (1-3 weeks depending on your trade).

  6. rhodium says:

    Let’s see. Financial crisis → high unemployment → low demand → weak profitability → oh no economy is sick → better loan more money to the corporations → corporations invest overseas or play short-term enrichment scemes → damn the consumers still haven’t shown up → corporations in deeper debt, outlook getting worse → we need the consumers to start spending more money so that we can service these outrageous loans! → covid-19 → damn we need to create more money to lend these corporations.

  7. leanFIRE_Queen says:

    France should grow a pair and let the flood of bankruptcies happen. It’s the best possible ending to the debt pile after a decade of unnecessary ZIRP.

    • Joe Saba says:

      wow – how PRO business you are – letting every MAL-INVESTMENT fail as it should – ie they were stupid

  8. fromks says:

    Forest service used to stop all forest fires, then they realized it was building up a lot of fuel by doing so.

    Eliminating consequences does not eliminate risk. Risk accumulates in the absence of consequences.

  9. BuySome says:

    Ingenious! By running up the debt so high, France will never have to worry about the re-unified German state ever making new plans for another invasion. Stinky cheese and wine just isn’t worth the expense. It’s far better than that old Maginot Line idea.

  10. BoyfromTottenham says:

    In times of almost zero interest rates it is easy for a borrower to forget that the Capital on every loan eventually has to be repaid. I used to have a home mortgage and still remember that paying the interest was the easy part. Repaying that d**n principal was much harder.

    • JZ says:

      The solution to the difficult problem of repaying the principal is to not repay the principal. Just keep rolling over the loan and never amortize the principal. Let inflation take care of the principal.

  11. raxadian says:

    Can the French government suddenly decide they won’t guaranteed more debt?

    Not that will happen with the current president but it looks like that and raising interested to at least 0.01 is in the future unless they want more trouble.

  12. dr spock says:

    The buzzards and vultures are circling France and the UK, which are both in trouble. Chinese companies are buying their companies. The government of France stepped in to buy Airbus and protect its aerospace industry.

  13. cb says:

    Nick said: “Yet many of the companies’ operating profitability has been falling for years. In a core sample of 177 large corporations, average operating profitability decreased from 11.1% to 9.8% between 2016 and 2018.”

    What is operating profit? As a % on what?

    • MC01 says:

      It’s a percentage of operating revenues* which gives the measure of potential profitability. It’s also known as EBIT (Earnings Before Interest and Taxes) because differently from EBITDA the formual used also takes into account Depreciation and Ammortization.

      *Operating revenues as defined by PCG (the French rough equivalent of GAAP) exclude any losses and profits generated by the company’s ancillary investments such as stakes in other company and interest accrued from securities used to park excess liquidity.

      It must be remembered here that since 2016 France has suffered a long string of corporate bankruptcies with a common driver: extremely high debt loads. While interest rates may be at an all time low, principals alone are crushing: if the operating profit is shrinking (as Nick reported), it means less cash is left to service that growing mountain of debt. Even if corporate interest rates were to get to 0% (and they will get there), it would change very little for these ultra-indebted corporate titans: perhaps it would buy them a couple of years, or allow to report a tiny profit in one fiscal year and then what?

      I’ll give you an example: Auchan of France is the second largest supermarket chain in the world and the second largest in France. It closed FY2019 (same as the solar year so the virus cannot be blamed) with a loss of €1.1 billion. The company is not merely buried under a mountain of debts, but all its divisions but two (fuel stations and gardening stores) are bleeding cash.
      Auchan is closing stores and selling their international operations, but will it be enough?

    • Wolf Richter says:


      What matters is the message that these companies have decreasing income from operations (cash flow) year-after year to pay for their debt burden that is increasing year-after-year. That’s how companies get in trouble.

    • cb says:

      And that raises another question. Why report operating profit as a metric at all. Isn’t it better to report true earnings – the earnings after debt and taxes, particularly if the point of the article is to point out the impact debt and debt service is having on companies???

      CNN is famous for calling out ebitda, as if true GAAP earnings were not the true metric most companies should be valued on. Let us not fall into the same propaganda trap – for that is what it is.

      • Wolf Richter says:


        This can be approximated in many ways, including EBITDA and other measures. So these measures are essential and should be reported along with net income. But they’re not a measure of “profit,” but a measure of how well a company can deal with its debts, and by extension, how risky a company is. This is reflected in the bond ratings. A company with perennially thin or negative cash flow is going to have a junk credit rating.

        • cb says:

          Wolf said: ” So these measures are essential and should be reported along with net income.”

          Agreed 100%. along with net income ………..

        • Wolf Richter says:

          Net income is always reported on the financial statements of publicly traded companies. It’s the “bottom line” of the income statement (well, almost the bottom line … there usually are per-share figures below it). Whether or not the media report net income figures is another matter.

  14. historicus says:

    Borrowers control the interest rates
    Looters control law enforcement
    A pattern is developing

  15. Dave Mac says:

    The “yellow-vests” may have something to say about the situation

Comments are closed.