Daily Commentary

MarketMinder’s View: Here is the latest twist on a long-running concern: debt and nations’ (in this case, France’s) ability to manage it. For years, Italy and France have taken turns at the nexus of eurozone debt concerns, and now it seems France is back in the spotlight. As this article notes, “France already is the most bloated state in Europe, with public spending at around 58.2pc of GDP in 2022.” Couple relatively higher social benefits spending (compared to European peers) with subsidies to shield French households from surging energy costs, and credit rating agencies are sounding the alarm on France’s rising debt load. “Fitch – which recently downgraded France’s credit rating to AA-, putting it in the same league as the UK, Czech Republic and Estonia – sees no end in sight for the country’s rising debt levels as policymakers fail to rein in spending once again. … Meanwhile, S&P said last week that France remained at risk of a downgrade before the end of the year, which could add to the country’s borrowing costs. The verdicts put France in a club of countries that not long ago were associated with bail-outs and Brussels diktats. While France’s debt share is now projected to rise, Greece, Italy and Portugal are expected to see their debts fall relative to the size of their economies.” The rest of the piece shares experts’ opinions on where French debt will go from here—optimists think future growth will boost tax revenues, keeping costs manageable, while pessimists worry today’s higher interest rates will make debt burdensome. We don’t dismiss these concerns or long-term projections, but there is an unacknowledged reality here: French debt isn’t a major problem in the here and now, as it looks pretty manageable. (We would add credit ratings agencies aren’t exactly oracles, and downgrades often don’t boost rates.) Consider: French net interest payments were about 11.1% of annual government revenues in 2021—a ratio that is similar to the US and not automatically a major economic hindrance. Now, we aren’t saying countries can keep adding debt without consequences, but from an investment perspective, markets care more about the next 3 – 30 months than 5 – 10 years from now. In our view, France’s debt doesn’t appear to be a major issue for the foreseeable future. For more on France, see our March commentary, “On French Pensions, Protests and Potential New Elections.”

MarketMinder’s View: The big numbers here do sound scary: “About $1.5 trillion in commercial mortgage debt is due by the end of 2025, but steeper borrowing costs, coupled with tighter credit conditions and a decline in property values brought on by remote work, have increased the risk of default. … Complicating the matter is the fact that small and regional banks are the biggest source of credit to the $20 trillion commercial real estate market, holding about 80% of the sector's outstanding debt. Regional banks were just at the epicenter of the upheaval within the financial sector, and there are concerns that the turmoil could make lending standards drastically more restrictive.” But a commercial real estate soft patch doesn’t necessarily mean big trouble for the banking system, let alone the US economy at large. One, offices aren’t the primary driver of commercial real estate loan growth—multifamily properties are. Two, while some financial institutions may be overexposed to offices, those that exceed commercial real estate exposure guidelines are a tiny slice of publicly traded banks (based on total assets)—limiting the broader impact. Three, the industry’s issues are well known at this point, sapping their negative surprise power. In our view, commercial real estate fears are a classic brick in the wall of worry bull markets climb. For more, see our April commentary, “Weighing Commercial Real Estate Concerns.”

MarketMinder’s View: In line with the World Bank’s latest global GDP forecast, the Organisation for Economic Co-operation and Development (OECD) revised its growth estimates for 2023 to 2.7%, up from March’s 2.6% and last November’s 2.2%. “A fall in energy prices, the easing of supply chain bottlenecks and China’s sooner-than-expected reopening have added to the recovery, but higher interest rates and stubborn inflation have both cast a shadow. … The OECD upgraded predictions for the United States, China and the eurozone, but said that while growth had stabilized, improvement was fragile and risks were ‘tilted to the downside.’” This is the latest example of an organization upwardly revising their growth expectations—see the Bank of England’s update for the UK economy—as Q1 economic data turned out to be more resilient than many anticipated, for the most part, even including the fact the OECD released this before the eurozone’s revised GDP report showed the shallowest of recessions, using one popular definition, in Q4 2022 and Q1 2023. Still, as with the World Bank’s outlook from earlier this week, the OECD’s view seems to be pretty dour—a sign reality has a low bar to clear to beat meager expectations.