Livret A high score in eight questions

Posted on Jul 13, 2022, 7:10 AMUpdated Jul 13, 2022 at 10:16am

France is entering a new era of savings. On Wednesday, the Governor of the Bank of France, Francois Villeroy de Gallo, should send his recommendation to the government on the rate of Livret A. Last week, he warned that the increase, which will take place on August 1, will be “significant”. The rate is likely to double from 1% to 2%. Even more if the government decides to add a payment. Again in eight questions about the changes caused by this increase.

1. How is the Livret A rate calculated?

The Livret A rate is reviewed every six months. Its calculation is the result of an equation that takes the average between inflation in the past six months and the interbank rate (€str).

On Wednesday, the Bank of France will know the final CPI for June, which will then be able to make the calculation and immediately make a recommendation to Percy. The government decides the applicable rate and then announces it. It may take a few days.

According to the latest estimates by the National Institute of Statistics and Statistics (INSEE), inflation was 5.8% in June, or a six-month average of 4.46%. When applied precisely, the formula will give a result of 1.94%, calculated as Cercle de l’Epargne, giving the right to a 2% rate of return for Livret A such as Livret de développement Permanent et Solidaire (LDDS).

The Popular Savings Account (LEP), which is intended for low-income families, and is calculated solely on inflation, should also see its rate double, to 4.5%.

2. Is this a historical increase?

The rate has doubled in barely six months: this event is already unprecedented. The increase from 1% to 2% will follow the doubling of the rate last February (from 0.5% to 1%). We have to go back to the 1960s to find traces of doubling the rate.

Periods of high inflation are logically favorable for sudden increases in the Livret A rate. This was the case in 1974, with a 175 basis point increase, for a 6% return, or in 1981, with a 200 basis one shot, at 8.5%.

On the other hand, we have to go back ten years to reconnect at a rate of 2%. The period of low rates that characterizes the last decade has already affected the yield of Livret A.

3. How much will it bring to savers?

At the end of 2020, 55 million individuals in France owned a Liverett A, with an average of 5,500 euros, according to the Observatory of Organized Savings. At a rate of 2%, the profit over the course of the year should come to an average of 110 euros, or 55 euros more than the current yield.

Given the estimated inflation of 5.5% for this year according to INSEE, the real return remains negative in the end: for a booklet of 5,500 euros, the “loss” would be 192 euros.

4. How will savers behave?

The increase in yield should have a logical effect on the collection. This is what happened in the months after the rate hike on February 1st. Inflows remained dynamic until May, bringing the competitors’ total to 359 billion euros, despite accelerating inflation.

Alan Torgman, economist at BPCE, predicts, “There will be a global recovery in collection in all regulated savings accounts. Aside from hurting the PEL (Housing Savings Scheme), there will be little to no equity arbitrage, and reallocation toward credit ledgers should relate New inflows of investments this year.

Apparently savers won’t empty their life insurance to bring everything home in Livret A. But the new rate could encourage them to feed more, when they’re not satiated. The ceiling is set at €22,950 per person. At a rate of 4.5%, the LEP should gain vision.

5. Is life insurance still attractive?

The situation is somewhat atypical. With a return of 2%, Livret A becomes almost twice as much as life insurance, the other investment of choice for the French, whose average return, relative to Euro funds, oscillates around 1.2% (before taxes).

“A short, ultra-liquid product becomes better than a long product: it is very unusual,” comments Philippe Crevel, director of Cercle de l’Epargne.

In this context, insurers at the end of the year may be tempted to increase the return on euro funds in order to support inflows. But because euro money is largely invested in long-term bonds, at very low rates, it is still difficult to quickly improve performance.

“Insurers will continue to promote unit-linked contracts, which allow investment in forms of support that have more or less offensive risk-return profiles (eg equities, editor’s note),” says Alain Tourdjman. It won’t necessarily be easy given the downturn in stock markets.

6. How will other savings products develop?

With inflation and rising interest rates, competition in unregulated savings products is starting to rise again. Lifting Livret A, which acts as an indirect reference in the market, can highlight this phenomenon. “At 2%, we are getting close to the symbolic rate of 2.5% considered acceptable by savers for financial investment,” says Alan Turgeman.

Some players have already started the commercial offensive. C’est le cas de PSA Banque , le bras financier du constructeur auto Stellantis, qui vient de doper le rendement de son livret d’épargne pour passer de 0,5% à 0,7%, avec un taux de 3% offert pendant 3 months.

Banks may be tempted to follow the movement by increasing their ledgers, which have an average return of nearly zero, to 0.09% according to the Banque de France. Like Livret A, amounts owed from unregulated savings accounts have increased dramatically since the health crisis, up more than 30%, to €220 billion.

7. What is the cost to banks?

If the rise of Livret A is good news for savers, the bill promises to be salty for banks, which focus 40% of fundraising. According to Fitch estimates, a price increase of 100 basis points would cost them close to two billion euros.

This amount is added to the 1 billion euros due after the increase in February (from 0.5% to 1%). In total, over the course of a full year, the effect of Livret A at 2% and LEP about 4.5% could cost banks more than 3.6 billion euros, or about 6% of income. Retail banking in the sector.

The groups most exposed are La Banque Postale, which owns just over a quarter of Livret A accounts, and Caisses d’Epargne, the historical player in structured savings. As last February, banks tried to present their arguments to the authorities to limit the rise. “But in the face of the inflationary slope, we are clearly not being heard,” one banker admits.

8. What is the impact of social housing financing?

The cost of the resource will also rise for the deposit fund, which concentrates 60% of the amounts collected by the banks, through its provident fund.

The main task of the funds from Livret A is to finance social housing, a Caisse franchise. Nearly 100,000 homes come off the ground each year thanks to this money, which can be loaned out to social landlords.

Problem: The Caisse loan rate is indexed by regulated savings rates. Thus, an increase in Livret A will increase the cost of financing social housing, in an already tense economic context for landlords.

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