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The effect of non-resident investments on the French sovereign spread

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  • Pierre Bui Quang

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

Cross-border investments in public debt securities are a key driver of sovereign yields. Everything else being equal, higher external demand lowers the cost of public financing through debt. However, from a financial stability perspective, it seems important to assess the resilience of sovereign debt against non-resident divestments, as cross-border flows tend to be volatile. Our paper adresses this issue for the French public debt. It relies on estimating the increase in yields that is necessary for the domestic financial sector to reallocate enough of its securities portfolio to compensate for hypothetical non-resident divestments. Our results indicate that if the share of non-residents in non-central bank holdings of French public debt had decreased regularly by an extra 1.25 pp compared to actual evolution, over the year from 2016-Q3 to 2017-Q3 (hence amounting to a 5 pp decrease in total), the sovereign yield would have been by around 40bp higher in 2017-Q3. Given the amount and the maturity of gross debt issuances over this period, and using the German bund yield curves for discounting, the corresponding extra cost for public finances in 2017-Q3 would have been around 6Bn €.

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  • Pierre Bui Quang, 2018. "The effect of non-resident investments on the French sovereign spread," Working Papers hal-04141676, HAL.
    • Handle: RePEc:hal:wpaper:hal-04141676
    Note: View the original document on HAL open archive server: https://hal.science/hal-04141676
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