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D I V I S I O N OF I N T E R N A T I O N A L F I N A N C E
BOARD OF e O V B R N O R S
So]3137
February 12, 196k.
CAPITAL MARKET DEVELOPMENTS ABROAD
lie Nine Charts on Financial Markets Abroad
I. France: Money and Capital Markets, October 1963-January 19 6L
During the period under review, the effects of the French stabilization
measures announced in September could be found in a marked slowdown in the rate
of expansion in the money supply and a sharp increase in fourth-quarter imports;
these heavier imports cut into the balance of payments surplus but they helped
to slow down internal price risese The extension in late January of the
ceiling on bank credit which was due to expire on February 29 represented no
further cut back in the projected rate of credit growth from the reduced levels
set in September» In financial markets, there were new increases in yields on
long-term bonds and on "free investment" Treasury bills„
With the reduced trade surplus, adjusted reserve accruals dropped
from $79 million in November to $U0 million in December and to $2U million in
January, Third-quarter balance of payments results (just available) show an
over-all surplus in 1963 somewhat below the comparable figures for 1962®
(See Table 1, and, for details, Table 8»)
Table 1. France: Selected balance of payments statistics9 quarterly
(in millions of U.S* dollars7"
"
I
1962III
II
ll£
118
115
All other transactions 1/ 193
272
128
Over-all balance 1/
390
286
Trade balance (f,o.b.)
308
IV
9k
c115
209
I
1963 •
III
II
31
12
' 98
186
388
111
217
Loo
209
1/ Before debt prepayments.
Thus far, the effects of the stabilization program can be found in
four main areas:
a. The money supply increased by 5„3 per cent between September
and December, a rate almost one-third below the expansion in
the last four months of 1962e For the year 1961:, the Finance
Minister expects a rise no greater than 10 per cent compared
with annual increases of 18 per cent in 1962 and 13-1/2 per
cent in 1963.
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(Decontrolled after six months)
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be
An upsurge in imports has followed the French tariff reductions
announced last autumn; in the fourth quarter, seasonallyadjusted imports were nearly 10 per cent above third quarter
levelso -Imports advanced further in January, (See Table ?•)
c, On the fiscal side,.the Finance Minister appears determined to
carry out his commitment to reduce the budget deficit from 7
billion francs in 1963 to k»l$ billion francs in 196U (as
"\prdvided in the budget bill passed in December by the Assembly)0
xn January he also announced the intention to hold the deficit
at that level for 196£, Normally, the annual flow of private
savings to the French Treasury (from savings banks, and sales
of Treasury bills and long-term bonds to the general public)
would cover deficits of this magnitude*
do
Finally, the rate of price advances was about half as rapid
in the final three months of 1963 as in the same period of
1962 c, as may be seen in the following price changes (in per cent
per annum:
Wholesale food prices 1/
Sept,-Dec.
1962
6.7 °"
""
Retail prices
1.9
Sept,-Dec,
1963
3.7
1,0
l/ Factory prices of manufactures have been controlled since
September, and fuels and energy are produced by the government.
Monetary reforms are instituted
Four changes in French monetary practices were announced on January 22
as "completing the task undertaken within the framework of the stabilization
plan," However, they are structural reforms rather than anti-inflation devices.
Firsts the commercial banks' compulsory portfolio of Treasury bills
was reduced from l£ to 13 per cent of deposits. The change does not constitute
any relaxation of credits the banks' comprehensive liquidity ratio is still
maintained at 36 per cent of deposits and, in addition, loans to customers are
restricted by the renewal of the credit ceiling, On the.contrary, it seems
another step toward the eventual abolition of "required" bill holdings, first
introduced in the early postwar period to freeze excess liquidity in the banking system, the fourth such reduction since January 1961, when the figure was :
25 per cent. Henceforth, the compulsory holdings are to be known as Treasury
certificates and will continue to yield 2-3/8, 2-7/8, and 3-1/8 per cent on
3-month, 1-year, and 2-year bills, respectively,
A second change applies to the Treasury bills held in excess of the
required minimum (which have been sold at thrice-monthly auctions since April 1963),
On January 22 the Finance Minister declared that in the future the rates at the
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- 3 °
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auctions "will be freely determined as a function of supply and demand."
Previously, the Treasury is reported to have refused to accept bids yielding
a return higher than the fixed tap rates on the compulsory holdings (see above)
according to La Vie Francaise of January 31° Under the new system, only
1-year bills will be offered by the Treasury.
A sharp rise in bill rates has been the initial result of this
reform of the auctions. One-year bills were sold to yield 3.65 per cent at
the January 29 auction and 3»6l per cent on February 5. (See Table 2.)
Earlier, these rates had never been above 2-7/8 per cent and had often been
lower®
Table 2 0 France: Treasury Bill Auction Rates: Septo 1963-Feb. 196k
•
"
(per cent per annum) "
"
"
3-month
September
October
November
December
January
February
Sources
25
25
25
5
16
26
6
15
29
5
2.12
2.00
2,00
2.00
2.00
2.00
2.00
2.36
—
-=
*
"FREE INVESTMENTS"
1-year
2.87
2.50
2.88
2.88
2.88
2.88
2.88^
2.88
3*65
3*61
2-year
3»12
3<>10
3=12
3»H
3.11
3®12
3ol2
3ol0
Bank of France-
The Financial Times of January 31 said that these higher rates
"resulted in precisely the opposite outcome to what had been intended." ,
This appears likely to have been the case5 the officially-stated purpose
of the auctions given last April (when they were first instituted) was
to reduce short-term rates to encourage investment in longer-term paper.
The Financial Times ascribes the higher rates to a "temporary shortage of
funds," but they may have arisen from a temporary glut of bills in the banks'
portfolio. The lowering of the required holding was equal to about 1.5
billion francs, or much more than the I.O million francs of bills offered at
4O
each of the last two auctions.
A third measure was directed at encouraging the flow of individual
savings into long-term securities. Rates on one type of the (non-marketable)
Treasury bills sold to the general public were cut 10 to 20 basis points.
This follows earlier reductions in yields on this general category of Treasury
paper over the last three years. As these instruments are tax-exempts the
latest reduction reduces yields by 20 to I. basis points for individuals in
4O
the 50 per cent income tax bracket.
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Finally, in a minor move, the Bank of France rate on 30-day
advances to banks against government securities was raised from 3 to U
per cent on January 23 in order to align it with the basic discount rate*
These advances are of very small importance.
Seasonal factors dominate money market
The Paris money market went through three phases between November
1963 and early February^ In December, the banks became less liquid as the
note issue increased. Day-to-day money rates against private paper rose
to a peak of 7-8 per cent on December 27-31 and the banks were forced to
discount some paper at the $ per cent ("hell") and 6 per cent ("super-hell")
penalty, rates at the Bank of France,
By mid-January,.with the note reflow, the market eased into a
quite liquid state. The banks reduced their discounts at the central bank.
On February 5 the market absorbed Fr UOO million of 1-year Treasury billsj
with some excess liquidity absorbed, day-to-day money rates returned to about
the early December levels of U,1 per cent (normal for a discount rate of U
per cent)= (See Table 3«)
Over the past 12 months, however, the effect of the creditstightening measures has been to increase the level of day-to-day money rates,
(See Table 3,) Much of the increase in day-to-day rates is explained by
the. 1/2 per cent increase to U per cent in the discount rate in November
1963, However, the average level of rates in December^January was up over
the year by more than 1/2 of 1 per cent, because, with tighter conditions,
more discounting has been at the 5 per cent and 6 per cent penalty rates
over the month-end.
Security markets active3 bond yields rise
For a second successive quarter, new security issues were in much
greater volume than a year ago. In the July-September quarter net new
issues at 3«31 billion francs were over 2-1/2 times more than a year
previous. (See Table In) The Treasury loan in September!/ accounted for
2 billion francs of this total. In addition, private borrowers placed
another 1,33 billion francs (net) in new issues or nearly 12 per cent above
the year-ago level.
Over the first nine months of 1963, net new issues including the
Treasury ran 63 per cent ahead of 1962 and excluding the Treasury were up
18 per cent. However, the gain in issues by the competitive (largely privaite)
sector was only U per centa
17 See Frances Money and Capital Marketsa August-November0 19635 dated
December 11, 1963.
~~
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Table 3.
• ' .
France: Day-to-Day Money Rates Against Private Papers
September 1963-"February 1961;
'
(per cent per annum)
Monthly Averages
September
October
November
Daily Rates 2/
December 6
13
20
26
January
2
9
16
23
30
February 6
1963-61;
1962-63
3.13
3.61;.
U.l1;
3-U8
3.51
3.SO
U.06
U.06
U.31
6.06
6.25
h.9k
3.69
3o50
I0O6
U.12
3o50
3 .UU
3.50
3.63
3.Wt
3.38
2.88
3.14;
3.50
3.38
T7 Average of daily range« Days shown are for Fridays in 1963-61;$
1962-63 data are for Thursdays in same week.
Source; Bank of France.
Yields to maturity on third-quarter new issues (see Table h)
were very close to those on new issues in the second quarter,, and do not
reflect the substantial rise in long-term market yields which began in
mid-Septembere
Parliament has authorized the Treasury to issue, prior to
May 10, 1961;, another loan with tax-exemption features, up to an amount of
2 billion francs. The Finance Minister has indicated the likelihood of a
new loan in March, although the amount may be less than 2 billion francs®
Long-term bond yields moved up again in December-January. Yields
on public sector bonds rose almost continuously from 5*51 per cent at the
close of November to $<>65 per cent in the last week of January* (See
Table 5 0 Yields on corporates were irregularly higher, averaging 6.21; per
cent in January compared with 6oil; in November and 6.21 in December. The
recent rise in yields, which dates from the start of the stabilization
program in mid-September, has carried long-term yields up almost 30 basis
points on both-public sector and corporate bonds.
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Table lu
France: Net New Security Issues, 1962-63
(in billions of francs)
I»
Issues by Sector
I
Treasury
Public authorities
Public credit institutions
Other public sector
Competitive sector
Stocks
Bonds
Partnership participations
Total
IIo
- 6 -
1962
II
SL
eoeo ,
I
1963
II
1.00
.25
.70
.33
1.68
1.26
.3h
.08
.29
1.0U
.59
.38
.07
3.96
3.33
—
.16
.9.0
1.01
1.21
.88
o2U
.0?
.10
.55
1.53
1.53
1.03
oUU
.06
.01
1.02
.73
.23
.06
1.05
1.3k
1.19
.86
.26
.07
3.12
2.37
1.19
3.58
SL
2.00
Yields to Lender on Major Loans, Third Quarter» 1963
Caisse Nationale des Autoroutes
Compagnie de Saint - Gobain
Treasury (20 years) 1/
Groupement de l1Industrie
chimique de synthese
$<>$8
5.72
U.60
5.72
1/ Interest exempt from personal income tax in first 10 years.
Sources Conseil National du Credit.
Table 5. France: Long-Term Bond Yields, 1962-61i—^.
Last full week of month;
1962 - December
1963 - January
August
November
December
1 6 j - January
91.
Week ending:
1963 - December 13
27
196U - January 10
2k
31
Public Sector&Z
5.^6
5.Uj.
5.36
5.51
5.58
5.65
Corporate
-
5.57
5,58
5.59
5.63
5.65
17 Redeemable bonds, excluding indexed and participating issues.
2/ Excluding Treasury bonds (which have income tax advantages).
Sources Bank of France«•
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6.05
6.05
60 00
6.20 . .
6.22
6023
6.20
6.22
6.22
6.25
6.23
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- 7 -
.
Sharp fluctuations in stock prices in recent weeks were related
by observers to changes in traders" psychology rather than to any change in
the business situation.
Prices continued to fall in early December, and the new low for
the year on December 13 was 18 per cent below the market's level at the
start of 1963o A cut in margin requirements on futures transactions on
December 13 was interpreted as indicating a more favorable attitude by
government toward investors, and a brief rally ensued0 In early January,
Prime Minister Pompidou expressed the view that the 1963 decline in stock
prices had been overdone,, This remark led to the market's first strong
advance since last summer, with prices rising nearly 6 per cent between
January 3 and 17o (See Table 60) (One year earlier, prices had plunged
after Mr, Pompidou said French stock prices were too higho) However, another
drop in the market — for which analysts had no ready explanation — set in
at the close of January, and by February 5 most of the January price gain
was erased,,
Table 6„ Frances Index of French Stock Prices, I963-6I1.
(for week ending on date shown3 Dec, 29, 1961 » 100)
1963 - high (Jan, k)
low (Dec, 13)
November 29
December 13
20
27
Sources
IOU06
86,1
89.3
86*1
86.8
88.li
196b - January 3
10
17
2h
31
87*3
90o9
92.2
9208
91.L
I0N0S0E®'
Reserve gains continue but at reduced rate
Increases in official holdings of gold and foreign exchange
dropped from $79 million in November to $U0 million in December and then to
$2U million in JanuaryJ/ No special transactions took place in either month.
The available data suggest that the French surplus in the fourth
quarter was reduced from the year-ago level„ In the; first place, the official
reserve gains (adjusted for special official transactions) of $1U1 million
in October-December of 1963 were b61ow the $198 million gain in the comparable
months of 19620
TJ The French Exchange Stabilization Fund reportedly acquired no dollars
from the market in the period January 10=3lo However, the Bank of France
balance sheet shows an increase in reserves of $l£ million in this period.
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- 8 -
Second, France's seasonally-adjusted trade deficit (imports c„i«f0)
was $333 million in the last quarter of 1963 in comparison with $81 million
a year earlier« (See Table ?c) Placing imports on an estimated f 0 o 0 b 0
basis and eliminating trade with the overseas franc area, the balance
(unadjusted for seasonal variations) shifted from an estimated "surplus of
$100 million to an estimated deficit of $27 million between these two quarters.
<
Table ? . Frances Seasonally-Adjusted Foreign Trade„ 1962=63
(in millions of dollars)
Quarter
1962 - I
II
III
IV
1963 - I
II
III
IV
Month
1963 - September
October
November
December
January
196L
Sources 0ECD»
Imports
Coiof0
Exports
l,7lt0
1,767
1,917
1,965
2,OOU
2,llt2
2,181
2,U15
1,85k
1,791
1,833
I088L
1,857
2,085
2,0#
2,082
752
836
769
809
880
670
711
660
712
Balance
-
-ll
hli
+ 2h
- 8L
= 8.1
*
-1U7
- 57
-123
-333
- 82
=125
-109
. 97
-136
Finallys the third quarter saw a resumption of the tendency
toward a reduced over-all surplus«. Third-quarter transactions yielded an
-over-all surplus of $209 million, down from $286 million in July-September
1962.
The trade balance (payments basiss imports f„o.b.) was consistently
less favorable iif 1963 because of the much heavier increase in imports than
in exportso (See Table 8,) The surplus on current invisibles was also
lower in all of the first three quarters of 1963, largely because of a big
rise in French expenditures for foreign travel«
By contrast with the weakened position on current transactions,
the surplus on capital movements and other items has been maintained*, The
net inflow of private long-term .capital approached the 1962 rate in both
the first and third quarters; in the second quarter it far exceeded the 1962
rate because of heavy liquidation of foreign securities by French residents*
Even though short-term private capital, the net balance of the overseas
franc area, and errors and omissions have fluctuated, there has-been no
clear-cut deterioration in these accounts»
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- 9 -
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Table 8, France: Balance of Payments9 1962-63
(in millions of dollars)
Over-all Balance 1/
1962
1963
Year
158
98
9h
1*76
1,288 1,333
1*525 1,616
l,2Wi
1,508
1,1*81
5,361*
1,1*02 1,1:51
I,s# 1,628
1,1*02
1,606
1,575
5,81:0
193
186
272
388
128
111
115
717
95
71
163
125
3k
30
52
3W*
115
113
57
155
119
108
110
1*03
23
20
-77
-12
33
- 81
-3U
-32
-17
-27
-55
-57
-22
-127
26
50
31
23
63
9
26
11*5
50
15
15
92
58
12
*
=97
31
308
217
390
1*00
286
209
209
1,193
v
•-
-58
-62 '
Before debt prepayments*
?/ Including operations pending settlement•
Sources Ministry of Finance«>
IV
lie
12
115
31
, Balance on Non-Trade Items l/
1962
1963
A. Current invisibles
1962
1963
B 0 Private long-term capital
1962
1963
C, Private short-term capital 2/
1962
1963
D» Public long-term capital 1/
1962
1963
E e Overseas franc area
1962
1963
Errors and Omissions
1962
1963
Quarter
11
III
I
» Trade Balance 1962
1963
Ac Imports fo0obe
1962
1963
B. Exports
1962
1963
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In the foreign exchange market, because of France's less strong
balance of payments position the franc dipped slightly below its upper
limit against the dollar of 20.Ll U.S. cents on several occasions during
December-January/ The franc held at the ceiling in most of December bp.t
dropped to 20.399-20.UO^ between December 2? and January 2. It was again
quoted at just below its upper limit in the period January 13-28 and no
dollars were purchased from the foreign exchange market. The rate returned
to the ceiling on January 29, and some dollar purchases were then reported.
The price of the Napoleon gold coin tended to decline slightly in
the period under review, falling from U2.b0 francs at the end of November
to i±2.60 francs on February
European and British Commonwealth Section.
II. Nine Charts on Financial Markets Abroad
Chart 1 - International Money Market Yields for U.S.
Dollar Investors
Chart 2 - Interest Arbitrage, United States/Canada
Chart 3 - Interest Arbitrage, New York/London
Chart U - Interest Arbitrage for German Commercial Banks
Chart 5 - Short-term Interest Rates
Chart 6 - Long-term Bond Yields
Chart 7 - Industrial Stock Indices
Chart 8 - Spot Exchange Rates - Major Currencies Against
U.S. Dollar
Chart 9 - 3-month Forward Exchange Rates
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INTERNATIONAL MONEY
M A R K E T Y I E L D S FOR U . S . D O L L A R I N V E S T O R S
3 - M O N T H E U R O - D O L L A R D E P O S I T V S . U . S . C E R T I F I C A T E OF D E P O S I T
H9'
YIELDS.
D I F F E R E N T I A L : EURO D O L L A R O V E R
U . S . C E R T I F I C A T E OF D E P O S I T
NEW
Y O R K OFFER RATES O N
SELECTED 3 - M O N T H I N V E S T M E N T S
i
I
i
TREASURY BILLS - F u l l y H e d g e d
'
—
—
~
—
—
—
.
x X
f ' \ r - /
—
v
U.K.
1
C O M M E R C I A L PAPER - F u l l y H e d g e d
U . K . HIRE P U R C H A S E
CANADIAN FINANCE COMPANY
_1.
1
INTEREST A R B I T R A G E , U N I T E D STATES /
Thursday
CANADA
Per
figures
r•?'
cent
per
'
3 - M ONTt- 1 TRE 4SUR f BILL RATES
-
-
C A1<ADA
-
I
1
NITED $
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1 i
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I
!
1
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I 1
1 1
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I
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11
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i i
i i
i i
i i
I
RATE D I F F E R E N T I A L A N D F O R W A R D C A N A D I A N D O L L A R
SPREAD IN FAVOR Of CANADA
+
F O R W A R D RATE
I Dson —
icut
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r
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|
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RATE D I F F E R E N T I A L W I T H F O R W A R D E X C H A N G E C O V E R
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NET I N C E N T I V E I N F A V O R OF C A N A D A
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1961
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19 62
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1963
!
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INTEREST A R B I T R A G E , N E W Y O R K / L O N D O N
Friday
figures
Per
cent
3 - M O N T H T R E A S U R Y BILL RATES
RATE D I F F E R E N T I A L A N D 3 - M O N T H F O R W A R D S T E R L I N G
RATE D I F F E R E N T I A L W I T H F O R W A R D E X C H A N G E C O V E R
IN f A V O R Of LONDON
19 64
per
a nn
I N T E R E S T A R B I T R A G E FOR G E R M A N C O M M E R C I A L B A N K S
F i a fg
r d y iu
1
|
|
3 - M O N T H TREASURY B I L L S , I N T E R B A N K L E N D I N G RATE A N D
" EURO D O L L A R D E P O S I T RATES
GERMAN INTERBANK
L O A N RATE
„
I
EURODOLLAR LONDON
f
i
GERMAN TREASURY BILLS
|
-
|
r
r
RATE D I F F E R E N T I A L A N D F O R W A R D D E U T S C H E M A R K
SPREAD I N FAVOR Of FRANKFURT:
F O R W A R D RATE D I S C O U N T ( - )
I
I
I N T E R B A N K L O A N RATE
1 I J. f I I I
J
~i
TREASURY BILLS
H
^
r
RATE D I F F E R E N T I A L W I T H F O R W A R D E X C H A N G E C O V E R
I N F A V O R OF F R A N K F U R T < + )
NET I N C E N T I V E :
I
\
I N T E R B A N K L O A N RATE
i
\ i
S H O R T - T E R M I N T E R E S T RATES *
CANADA
.
v f
L O N G - T E R M B O N D YIELDS
/ u —
I j 1 J 1 1 1 I L L . J i I I L 1 I L 111.
.... . . I 1
..i
...1
1961
INDUSTRIAL
STOCK
INDICES
X?5i=joo
R'otio t t o l e
i V-Xy/
->
'o
o
1961
* New i o n e i
Swiss Bonk Cor p or ul 101. i n d u s t r i a l viock i n d u *
S P O T E X C H A N G E RATES - M A J O R
CURRENCIES A G A I N S T U.S. DOLLAR
/V
w
- !
Vv
J A P A N E S E YEN
Per c.»,
3 - M O N T H F O R W A R D E X C H A N G E RATE
Friday figures
A G A I N S T U.S. DOLLARS
A G A I N S T POUND STERLING - L O N D O N
PREMIUM +
A G A I N S T POUND STERLING - L O N D O N
PREMIUM +
FRENCH FRANC v X ^ ' v
, DISCOUNT
@FedFRASER