FRANCE ISSUES 50-YEAR GOVERNMENT BONDS

UNCLAS SECTION 01 OF 02 PARIS 001238

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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.

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France Innovates, Issuing 50-year Bonds
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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.

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Strategy to Improve Management of Public Debt
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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.

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The Issue was Popular among Investors
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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.

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Other Countries are Likely to Follow France
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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