French companies are more indebted than their Italian, Spanish and German neighbors. Their debt totaled almost 2,000 billion euros, or 73.5% of GDP at the end of the year. Why is France so special?
Cash reserves
This phenomenon is partly explained by the cash reserves built up by French companies after the 2008 crisis. As access to financial markets closed very quickly, they built up a safety cushion.
If we remove short-term investments and bank deposits from the debt of French companies, their debt ratio falls considerably. According to an Insee economic note published at the end of 2017, these cash reserves are held by the same companies, most often large groups in the manufacturing sector. When cash and assets held are subtracted from debt, " the debt ratio thus appears relatively contained within French companies ", the Insee note explained.
At the end of March, in the midst of the health crisis, the Governor of the Banque de France urged business leaders " not to build up liquidity reserves ". At the time, François Villeroy de Galhau declared: " It's pointless, and I'll say it again to the major groups, to draw on liquidity lines; there's no justification for it. The liquidity is there, and it will be there. I appeal to everyone's sense of responsibility.
Relatively low profitability
Another explanation for French companies' indebtedness is that their relatively low profitability compared to other countries has not prevented them from investing more and more since 2009.
Unable to finance these investments, French companies are borrowing from banks. Since 2003, they have been able to borrow at very low rates, averaging 1.22% in June 2020. This phenomenon has accelerated with the Covid-19 crisis and the State-guaranteed loan scheme (PGE).
Many multinationals
Last but not least, France is home to a large number of multinationals. France is the fourth largest country in the world for the 500 biggest companies, ahead of Germany, Switzerland and the UK. Multinationals have a very specific way of operating: they take advantage of very low interest rates to build up cash reserves, so as not to miss out on any acquisition opportunities.
Often, the head of the group takes on debt to redistribute funds to foreign subsidiaries, enabling them to finance activities. As GDP does not take into account the return on these assets, relating French corporate debt to GDP is not necessarily relevant.
However, the French High Council for Financial Stability has been urging caution for several years now, particularly in the event of bank lending rates rising again.