FRANCE ISSUES 50-YEAR GOVERNMENT BONDS

UNCLAS SECTION 01 OF 02 PARIS 001238 SIPDIS PASS FEDERAL RESERVE PASS CEA STATE FOR EB and EUR TREASURY FOR DO/IM TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER USDOC FOR 4212/MAC/EUR/OEURA E.O. 12958: N/A TAGS: EFIN ECON PGOV FR PBIO SUBJECT: FRANCE ISSUES 50-YEAR GOVERNMENT BONDS ¶1. SUMMARY. France has introduced a new financial instrument on the debt markets: 50-year Government bonds. Faced with an aging population and pension reforms, France tapped the bond market to take advantage of low long-term interest rates and robust demand. The issuance, which has been a success, fits the GOF strategy to improve management of its public debt. END SUMMARY. -------------- France Innovates, Issuing 50-year Bonds -------------- ¶2. On February 18, the GOF announced the launch of a 50- year bond issue. Chief executive at Agence France Tresor (AFT) Bertrand de Mazieres said with this new government bond ("Obligation Assimilable du Tresor - OAT),"we are opening a new frontier" in the euro fixed-income market, extending the market from the 30-year segment. The AFT, which manages the Government's debt, made the decision after an investor survey showed strong potential demand for 50- year bonds. The survey, which was conducted among institutional investors in Europe and the U.S., showed that aging populations, asset-liability mismatches at pension funds and insurance companies, and regulatory changes in the EU, supported a new bond with very long-dated maturity. The new bond is not directly available to individual investors, but individual investors may invest in them through mutual funds. ¶3. De Mazieres stressed that France maintains its tradition of innovating on the euro market. France is the first country to launch a government bond with maturity higher than 30 years. France was the first euro-zone country to issue French-inflation linked bonds in 1998, and euro-zone inflation linked bonds in 2001. -------------- Strategy to Improve Management of Public Debt -------------- ¶4. For the government, the timing was attractive to issue a 50-year bond, since euro-zone government bond yields have fallen to record low levels, offering the GOF new funds at historically cheap levels. Finance Minister Herve Gaymard had stressed that the issue was part of a strategy to give safety and liquidity to investors, while providing the GOF with the best financial conditions. He remarked that "this strategy was strongly related to rigorous management of public finances associated with the European Stability and Growth Pact, which aims to reduce budget deficit and debt." ¶5. France's public debt amounts to 64% of GDP. Negotiable debt amounted to 833 billion euros on January 31, 2005. Long-term bonds accounted for the bulk (67% or 560 billion euros),medium-term bills for 21% or 177 billion euros, and short-term bills for 11% or 96 billion. -------------- The Issue was Popular among Investors -------------- ¶6. Institutional investors, including insurance companies, pension funds, asset managers and hedge funds, subscribed for three times the amount of securities offered by the GOF. The strong demand prompted ATF to increase the size of the issuance to 6 billion euros, from an initial target of 3-5 billion euros. The bond will pay annual interest of 4%, and was priced to yield 4.21%. Deputy Chief Executive of AFT Benoit Coeure said "when you manage a new product you need participants from all parts of the market to make the issue liquid." 50-year bonds have the advantage of being low-risk fixed-income investments. AFT specialists explained that an increase in the volatility of interest rates, even limited, gives an advantage to 50-year bonds as the price of bonds decreases less if interest rates increase, and increase more if interest rates decrease. -------------- Other Countries are Likely to Follow France -------------- ¶7. Other governments could follow the French lead and issue 50-year bonds. Germany, Italy and the U.K. previously said they have been considering whether to begin issuing similar long-dated bonds. WOLFF