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Draghi Gives Hollande’s Faltering Economy a Leg Up: Euro Credit

French President Francois Hollande
French President Francois Hollande. Photographer: Simon Dawson/Bloomberg

French President Francois Hollande has Mario Draghi to thank for near-record-low borrowing costs.

With France barely expanding, Hollande had grown dependent on the European Central Bank president’s actions to keep borrowing costs in check. France pays 1.74 percent to borrow for 10 years, close to its all-time low and 10 basis points less than before Draghi unveiled an unprecedented package of measures to supply liquidity to the euro area and its banks. The drop from May 8, when Draghi promised action, is 20 basis points.

“France hasn’t delivered reforms but there has been a massive yield compression and the ECB’s action has been huge on that,” said Richard Kelly, a senior strategist at Toronto-Dominion Bank in London. “The ECB is supporting bank funding and that’s going to continue to anchor French yields.”

Draghi announced on June 5 that the ECB would cut its deposit rate to minus 0.1 percent, becoming the first major central bank to take one of its main rates negative. In a bid to get credit flowing, the ECB opened a 400-billion-euro ($544 billion) liquidity channel tied to bank lending and said officials would start work on an asset-purchase plan.

Sovereign bond yields across the 18-nation euro area fell and the premium France pays over Germany to borrow for 10 years slid to a three-year low of 32 basis points the following week.

The bond performance was hardly a vote of confidence in the French economy in a month when data was consistently negative.

The French economy is set to expand 0.7 percent this year, less than the 1 percent Hollande is counting on to create jobs and cut the budget deficit, national statistics office Insee said this week. Insee puts German growth at 2.1 percent, the euro area expansion at 1 percent and the U.K.’s at 2.8 percent.

Not Enough

The Insee report this week predicted that French exports and investment aren’t poised to accelerate as the euro area’s highest tax burden and climbing unemployment deter consumer and corporate spending.

“The purchasing power of households has improved, of course, but too modestly to bring a real acceleration in spending,” the national statistics office said. “Faced with demand that isn’t taking off and margins that remain low, companies are not inclined to invest and French exports won’t fully benefit from the improved world trade.”

Finance Minister Michel Sapin said yesterday that the government will maintain its growth target in the expectation that a tax credit for business kicking in now will help growth accelerate in the second half.

That “should restore confidence,” leading to “investment and hiring,” he said.

‘Unlikely Beneficiary’

So far, business sentiment has failed to improve. The Bank of France’s index of manufacturing sentiment fell to 97 from 98 in May, while the Markit Economics Purchasing Managers Index for services and industries declined to 47.8 this month from 49.6.

Insee’s own measure of business confidence unexpectedly fell to a 10-month low of 92 in June, the statistics office said yesterday in a separate release.

“France continues to be viewed by investors as the unlikely beneficiary of too little growth and too much ECB liquidity, which benefits French bonds,” said Lena Komileva, chief economist at G Plus Economics in London.

For Hollande, the low borrowing costs are easing the deficit-reduction effort and saving the government almost 1.8 billion euros ($2.45 billion) this year compared with what it budgeted for last September.

Take Advantage

Still, the ECB says France and other euro-area countries need to take advantage of its accommodative policies to overhaul economies and spur growth.

“Financial and monetary conditions are very favorable -- this is the moment for governments to reform to support productivity,” ECB Executive Board member Benoit Coeure said June 20 on LCI television.

Business leaders say France isn’t doing that.

“France hasn’t done enough in terms of structural reforms,” Henri De Castries, chief executive officer of Axa SA, France’s largest insurer, said in an interview on RTL radio yesterday.

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