The eurozone is at risk of fragmentation
Within a few weeks, the majority of the major central banks raised their key rates. Already five times for the Washington Foundation alone. It follows the European Central Bank. Everyone wants to rein in inflation (8.6% in the US and 8.1% in the Eurozone at an annual rate). And prevent price hikes from getting under control. However, the vortex of strong global demand, bottlenecks due to Chinese shutdowns and rising energy prices in the wake of the war in Ukraine, complicate its mission to keep inflation at around 2%.
Price hikes carry risks. Across the Atlantic, unemployment rates can rise. In Europe, a recession is looming. In the eurozone, another threat threatens: the risk of fragmentation, which is reflected in the differences (“margins”) between bond prices of member states. The yield on Italian debt exceeded 4% for the first time in eight years, while the spread nevertheless widened on German debt. “At the moment, the spreads are not excessively high, The chief economist at BNP Paribas, William De Vijlder, estimates. The European Central Bank can intervene and neutralize the effects. » The announcements coming from the Frankfurt Foundation, on July 21, will be eagerly awaited.
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The state and companies under the weight of debt
On June 16, interest rates on ten-year debt were hovering around 2.4%. However, a 1 point increase in interest rates results in an interest fee increase of 2 to 3 billion euros in the first year. More than that, to go up to 30 billion for the state over ten years. “This fee is already affecting the share of French debt linked to inflation [égale à 11 % de la dette globale]Within a few months, it increased from 1 to 7%., explains Dennis Ferran, CEO of Rexecode. This burden is currently 0.7 points of GDP. But it was mitigated by higher value-added tax receipts, as commodity prices rose.
France, which has spent a lot fighting inflation since the fall of 2021, has debts approaching 113% of GDP. Its deficit reached 6.5% at the end of 2021. Emmanuel Macron has pledged to reduce the deficit to 3% by 2027 and start paying off the debt in 2026. For this five-year term, Bruno Le Mayor, Minister of Economy and Finance, was approved on June 15 On budget efforts of 40 billion euros – 10 billion on pension reform, 20 billion on the state and 10 billion on local authorities.
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On the business side, the money will cost more due to higher interest rates and the need to repay loans guaranteed by the state after a grace period of two years, to those who borrowed. “They will be pinched on their margins, Denis Ferran analysis With parallel increases in cost structures: from supply prices to wages.»
More expensive loans for individuals
“It’s the end of the free moneysummarizes Guillaume-Olivier Doré, CEO of fintech company Elwin. Back to basics: money makes money again. » On the real estate side, interest rates are already up, jumping from 1.10% in December to an average of 1.50% today. “This is a less pronounced increase than that observed in the financial markets, Nuance Alexander Ser, Head of Sales Promotion at BNP Paribas. We are still very far from the 5 or 6% rates observed ten years ago. »
According to the Governor of the Bank of France, Francois Villeroy de Gallo, mortgage rates will increase by the end of the year, reaching between 2 and 3% over twenty years. With three consequences: an increase in the total cost of credit, an increase in personal contributions and rejected files: Société Générale and Crédit du Nord no longer accept new contributions from intermediaries.
The same note for consumer loans, which primarily attract low-income families. “We will go back to rates of 6% instead of 2% so far”Guillaume-Olivier Doré predicts. Including cars, where long-term rentals are popular with the French: 47.2% of car purchases by individuals in 2021 were made by leasing. “With higher prices, the consumer will be more cautious, which can lead to lower sales”The specialist adds. But there will not only be losers: savers will eventually benefit from higher interest rates and see an increase in the return on their investments.