TRANSCRIPT: Interview with AFT’s Cyril Rousseau on 09 December 2021

20 December 2021

By David Barwick – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on 09 December with Agence France Trésor Chief Executive Cyril Rousseau:

Q: Are you worried about the competing supply coming from the NGEU issuance programme being fully functional this year?

A: We are confident, given the fact that we have already operated this year with a very active EU issuance programme, first with SURE and then with NGEU. This made it possible to put in place all the coordination processes needed for everyone to access the market smoothly. And over the course of the year, the EU has developed a more and more transparent and predictable approach, which makes it possible for investors, looking at our own predictable approach, to have all of the information they need to make a choice. Last year there were question marks on our capacity to coordinate, on what would be the approach of investors, but now I must say that things are going quite smoothly.

Q: Are you worried about volatility arising from the French elections in April? Do you have any Plan B in case of any adverse scenario?

A: I note with interest that we have not observed such volatility at this stage. Of course, it might still happen; we had volatility related to the elections five years ago. But in terms of concern, I would say there is none, because we have a robust system and what happened five years ago showed that even with significant volatility around the election, we have no difficulty financing the state, by auction or even by syndication – we actually had a very successful syndication during that volatility in 2017. So, if there is spread-widening at some point, I would not say that it endangers our ability to carry out our mission. We have had even higher-volatility events since 2017, and each time our market approach proved resilient.

Q: What is your current attitude towards GDP-linked bonds?

A: When we launch any innovation, what’s important for us is to make sure that we can have a product that reaches our liquidity bar and faces sufficient demand to ensure a sustained and liquid market. Regarding the GDP-linked bond market for developed economies, at this stage we don’t see sufficient investor demand. It might be because investors can express their expectations for GDP through plenty of other tools. For us as an issuer, one element that you could say is attractive is that it is countercyclical, so you pay less in recession and more when there is growth. But if you look at inflation-linked bonds, they have similar behaviour, and you can possibly also say the same thing about short-term debt. Just look at what happened with our linkers, we had very low and even negative inflation in 2020, which reduced the interest rate burden, and we now face higher interest rate charges during the strong recovery. So I would say that even from an ALM perspective, we are not sure that it would add much.

Q: The ECB seems likely to decrease new purchases of sovereign bonds soon. What are the implications for you?

A: Indeed, when we look at the survey of monetary analysts, there are expectations that purchases will decrease. What is expected at this stage by investors is that it will not decrease as much as it has in the past, for instance between 2017 and 2019. Based on experience, it might have an impact, but maybe not as dramatic as some people think. There may well be an impact, because the reduced purchasing programme would mean reduced negative premia on the long-term part of the curve. The impact could be some steepening, in which case we might see investors demand a shifting on the curve. This is one of the reasons why we have announced, among the products that we are going to launch in 2022, that on the long-term part of the curve we would do something between 20 and 30 years without being more specific. But at this stage we don’t want to commit, because what we expect is that depending on what will be the impact of the evolution of the purchase programme, the interest of investors might move along this part of the curve back to 20 years or stay somewhere around 30 years. And we want to keep the flexibility to adjust to what will eventually be the situation.

Q: Are you concerned about the possible impact on more heavily indebted countries?

A: What we have seen since the beginning of the crisis is that a strong framework has been put in place with a budgetary part at the European level to ensure that the recovery will take place in a smooth manner. This is the focus at the political level, to make sure that member states are going to find the right policy mix to support the recovery.

Q: How do you expect financing conditions to change over the next year?

A: If you mean the absolute level of rates, I have no market view. We offer a range of products in order to be able to satisfy the needs of the various market participants according to their own market views. If by financing conditions you mean the ability of monetary policy to be transmitted to economic actors, I’m confident that the ECB will want to maintain the smooth functioning of those transmission channels.

Q: And no expectation about the evolution of financing conditions played a role in the decision of how much to borrow next year?

A: No. We are a frequent borrower, so whatever the financing conditions are, we are going to have to take them into account. So, our strategy has always been to say that we do not issue based on our views of what will be the evolution of financing conditions, in terms of either the absolute level of rates or spreads. Because we might be right one time out of two and wrong one time out of two, and at the end of the day we would just be adding the volatility of our market views to the general market equilibrium. We don’t want to do that; we want to be market-friendly. If you look at how we determine the amount of our medium- and long-term programmes, you see that our target is generally to cover the need of the rollover of the debt as well as our budget deficit. What is different in 2021 and in 2022 is that given the fact that we have pre-financed in 2020, our medium- and long-term programs are actually a little lower than what would be the addition of those two elements. And the reason we pre-financed in 2020 is not that we had a view on market conditions, it’s just that we wanted to make sure that we had all of the cash that we needed to cover the financing needs of the state in 2020, the size of which was very uncertain given the pandemics. We faced a very difficult situation in the spring of 2020, but we were ready to face another very difficult situation in the autumn. The good news is that in the autumn, the economy had learned to live with the pandemic, and the economic situation was not as bad as it was in the spring.

Q: Concerns that inflation will remain high, even if not as high as now, are increasing. What would it mean for you if this were to be the case, and do you have your own expectations?

A: Since we have no market views, we don’t have specific expectations. There are government forecasts that we use in order to prepare the budget, but we don’t have specific expectations as the DMO and we offer specific products for market participants who want to hedge their inflation exposure. What might change if we have higher inflation is that if the higher inflation is linked to a healthy recovery and means that we will converge to the target of the ECB, that would be very good news for everybody, including for us. If the higher inflation is due to other factors like lasting commodity inflation, the impact on the state budget and on the French economy might be less desirable.

Q: You said you would consider the syndicated launch of a new 30-year OAT indexed to the euro-area consumer price index (OAT€i), depending on market conditions – what are you looking at in particular?

A: This “depending on market conditions” is something that we generally include whenever we announce a potential syndicated deal in the indicative financing programme, so as to make clear that we do not fully commit to issuing a particular security regardless of market conditions. For instance, if demand totally disappeared or if there were a major dislocation of markets, then we would not add uncertainty by trying to issue a product that no one wants. But generally, when we indicate this in the indicative financing programme, we deliver during the year. So there might be circumstances where we wouldn’t be able to launch this particular new 30-year, but it is our strong intention to launch it so as to maintain our European indexed real yield curve. Our last 30-year euro linker now has a residual maturity of 25 years, so for us the time has come to create a new 30-year benchmark bond and remain a reference issuer for linkers in euro.

Q: Would you consider extending your nominal curve any further?

A: We already extended our curve massively this year by launching our new 50-year bond. In terms of duration extension, when we launched it, it was the longest duration extension ever, more than 10 years. In 2005, when we extended our curve from 30 years to 50 years, interest rates were higher, so the duration impact was much lower than what we did when we moved from 2066 to 2072 at the beginning of this year. So we have no problem extending the maturity of our curve. The question is, up to what point? This is linked to what we want to achieve, which is to have a market that is liquid enough, where there is long-term investor demand that’s large enough to support a benchmark bond that we are able to tap regularly. And our analysis is that when you move much further, in the euro market, you have a very limited number of investors with the liabilities that are appropriate, and so you run the risk of having a much more volatile investor base. And you run the risk of cannibalising the demand for shorter-term products.

Q: If Omicron or anything else unexpectedly increases your financing needs, what would be your instruments of choice to deal with this?

A: Our first line of defence – and this is how we reacted during the Great Financial Crisis and during the sanitary crisis last year – is an increase in the amount of short-term debt, BTFs. For that reason, as soon as the crisis is over, we intend to reduce the weight of short-term debt in our overall debt book, so that we replenish our response capacity for the next crisis. And this is what we are doing now by decreasing the euro amount of short-term debt this year. For next year, we intend to stabilise it, meaning a further decrease in the weight of short-term debt in the total debt as well as over GDP. So, first line of defence is definitely BTFs, short-term debt. And then - and it happened in 2020 - if it turns out that the financing needs are going to be significantly larger and there is capacity to absorb extra medium-to long-term debt in the market, in very exceptional circumstances, we might revise the financing programme. When we don’t have a major crisis, we refrain from doing so, because we want to provide predictability.

Q: Conversely, if surprisingly high growth were to make it clear that your plans exceeded the need, would you simply issue less short-term debt?

A: It tends to be the case. It depends on when we know that we don’t need as much financing. If it’s already the very end of the year, we cannot really reduce that much the issuance of BTFs, and so as a result we might end up with extra cash on the state account. But if it happens earlier, generally there is a reduction of short-term debt, in order once again to preserve the predictability of our medium and long term financing programme. We commit to ensure liquid markets for our products. If we have a very, very clear improvement of the situation, and it comes early enough in the year, we might, exceptionally, revise down our medium- and long-term programme.

Q: The average maturity of your debt keeps increasing. Is it your strategy to reach a certain target?

A: It’s not a strategy, actually. A lot of people fail to realise this, because it looks so much like a strategy, but it’s basically the result of where investor demand moves. If we look at recent history, where investor demand moves is the result of monetary policy. What we have seen is that with the impact of the asset purchase programmes on the long-term rates, investors move further away on the curve in order to pick up some yield, and as a result, the average maturity of the debt increases. Then, we have had major demand for 30-year bonds, and we have had a large issuance of 30-year bonds in 2019, 2020 and 2021. If there is a change in investor appetite, we might very well see a decrease in the average maturity of our debt. It does not necessarily mean that with the reduction of the purchase programmes we are going to see this. Remember that in 2019, when the net purchases had stopped, we had this very dramatic drop in yield and very strong demand for long-term and very long-term bonds in the summer, before the restart of the ECB net buying. So, in a nutshell, the answer is that we will answer to investor demand and the average maturity of the debt will evolve as a result. One last point is that given the fact that at this stage we have a long average maturity of the debt, the annual change in our financing programme has a limited impact on the average maturity of the debt and the impact is gradual.

Q: We had a positive surprise recently with respect to Italy’s sovereign credit rating; how much potential is there for a surprise with respect to France?

A: The two elements rating agencies are looking at are the debt trajectory and the long-term potential growth. I would say that in this respect, our assessment is that the French economy has exited the crisis in a rather good shape, with some elements actually better than before the crisis. We are now back at the GDP level we were at before the crisis. We have lower unemployment than before the crisis while wage inflation remain contained at this stage. And a lot of plans and reforms have been put in place during the crisis, also to address long-term challenges. So you have a lot of elements in our recovery plan addressing for instance the green transition and the inclusion of the young people in the job market and the economy. I would say that when you look at the rating agencies’ criteria, there are a lot of good things where we stand in terms of long-term growth potential.

Q: France’s debt-to-GDP ratio is set to remain elevated over the next years, with the budget deficit staying above 3% of GDP for at least another five years. Is this making life at all difficult for you?

A: Our mission is to finance the state whatever the needs and the target that the government and parliament annually sets in the budget. So, it’s our mission, whatever the situation. Now the deficit trajectory over five years is also linked to what will be the decision of the government and the parliament after the elections. And I would say that the situation also needs to be considered in the broader context of the kind of equilibrium that all countries in Europe will have to find between sustaining the recovery and setting a nice downward debt trajectory. And here we need to find the right balance between what is the debt trajectory that is ambitious enough to notably restore the resilience to face challenges without damaging the long-term growth potential.

Q: Could you explain a bit your new interest in adding a green dot to your curve?

A: We announced that we would consider and explore – “explore” meaning that it ultimately depends on the outcome of the study – whether the time has come to add a green dot on our real yield curve. The reason is that the feedback we had from investors and our primary dealers when we were preparing the financing programme showed that there is a major trend towards ESG products, which now concerns a broad base of investors, including investors who are looking at products providing protection against inflation. We also see that some buyers of green products might be interested in adding linkers to their investments. And so, we are going to explore the idea. It doesn’t mean that we are necessarily going to do it; it depends on the results of the preparatory work. But this is an innovation that we are quite excited to take a closer look at, and it will be an important task and focus for us in the coming months.

Q: Were you generally pleased with how the financing programme was received?

A: Yes, from what I have seen, even if we may not yet have all the feedback. The main message of our financing programme was that we follow a very stable approach, and when we enter into a time where there are uncertainties regarding monetary policy that might have an impact on the market, in this environment we want to bring stability, and so we are not changing our approach to the market. So the main focus is stability, and on top of the stability, potential green innovation on the linker curve. If I look at this innovation, the feedback I’ve gotten so far has been quite exciting, and regarding the stability of our approach, I guess it is also well understood. We are market-friendly, so we bring regularity and stability so that market participants can shape their views, plan their investment strategy and mitigate the uncertainty of the world by using those stable products. Stable also because we consistently provide a safe product and investors can be absolutely certain that they will be repaid on the due date, as they have been for the last more than 200 years. We don’t like to surprise the market.