How does the government fund its funding needs?

In France, government spending structurally exceeds revenue. To meet this funding need, the state raises funds in the financial markets. Explanations.

The need for public funding

Government spending exceeds its income. Thus, the state is an economic agent, structurally need funding. This is mainly due to:

  • Budget deficit for the current financial year;
  • Amortization (repayment) of overdue debt. These are debts issued in the past that must be repaid during the current year. Unlike households and businesses, the government borrows to pay off its debts: they say roll up debt “. Another feature, related to the previous one, is that the state does not replace every month or every year a share of the capital and a share of interest. It pays interest every year and returns the capital within the prescribed period.

The state’s need for funding for 2022 is 298.9 billion euros. This is due, in part, to the expected budget deficit (€155.1 billion) and the repayment of debt maturing in 2022 (€144.4 billion).

To finance this funding need, the state turns to financial markets. In particular, it issues two types of financial securities:

  • “Fixed Interest Pre-Calculated Treasury Bills” (BTF) with a maturity of less than or equal to 12 months, which means that these Treasury bills are repayable over a maximum period of one year.
  • “Treasury bonds” (OAT) with a maturity of 2 to 50 years. this is instrument of medium-term and long-term financing of the state.

Thus, OATs are the preferred form of public funding. As of March 31, 2022, they accounted for 93% of outstanding working debt, i.e. 2,058 billion euros.

Outstanding working debt

How are OATs issued?

OATs are issued under very specific conditions. On the first Thursday of each month, Agence France Trésor announces the amount it wishes to borrow in the following form:auction. He then turns to select banks called “Treasury Securities Specialists” (SVTs). Currently, 15 banking institutions have this SVT status, including 4 French ones – BNP Paribas, Crédit Agricole, Natixis and Société Générale.

At each auction, SVCs provide a price offer in a sealed envelope for the purchase of newly issued bonds, without knowing the position of their competitors. This process is called dutch auction system or “auctions with multiple prices and closed prices”. With this method, the state seeks to take the best conditions in order to raise as many funds as possible: therefore, it will choose the proposals that offer the highest prices.

The banking institutions that win the auction can then resell the OAT to their customers and other investors.

OAT issuance process