AGEFI Luxembourg - septembre 2025

AGEFI Luxembourg 12 Septembre 2025 Economie T he public finance indicators have severely deteriorated in recent quar- ters in France, the second-largest economy of the European Union and of Euroland, with a nominal dimension of over € 2.9 trillion in 2024, according to the estimates of Eurostat. In 1Q 2025, France ranked first in Eu- rolandandsecondintheEUintermsof the budget deficit-to-GDP ratio, with a level of 5.6%, almost double the 3% threshold of the Stability and Growth Pact(SGP).Therecanbenoticedthedi- vergence betweenFrance andGermany (the locomotive of the EUeconomy, with a nominal GDP of over € 4.3 trillion last year), with the gap in terms of the budget deficit-to-GDP ratio widening to over 3pps since 2Q 2024, as canbe noticed in the following chart. The budget deficit-to-GDP ratio in France and Germany (%) The deterioration of public finance in France is the most closely moni- tored development by the financial markets (from the EU perspective) since the sovereign debt crisis about a decade ago. I point out that financial markets have penalized France with increas- ing borrowing costs, the yield on 10-year bonds presenting a level higher than the Euro- zone average since June 2024. Furthermore, in July 2025, France paid the same interest rate as Greece on the 10-year Government bonds (3.36%) for the first time in history, according to the Euro- stat database. This level is over 0.7 percentage points higher than inGermany. Moreover, the spread between France and the Euro Area in terms of the yield on 10-year Government bonds has widened in recent months, reaching about 0.3 percentage points in July 2025 (record high level), according to Eurostat data, rep- resented in the the following chart. In fact, France has been confronted with the so- called snowball effect ,withanominal financingcost above the nominal growth of the economic activity in the recent quarters, as the annual inflation decel- erated to below1%startingFebruary 2025, the low- est since the pandemic times. The gap France – Euro Area in terms of the yield on 10-year Government bonds (pps) The high budget deficit, rising financing costs, and sluggish economic growth (annual rate below 1% starting 4Q 2024, according to Eurostat) have driven France’s public debt-to-GDP ratio above 114% in the first quarter of 2025. This is the highest level since the first quarter of 2022, as shown in the chart below. Thepublicdebt-to-GDPratioinFranceandGermany(%) I draw attention to the divergence between France andGermanyon this indicator (publicdebt-to-GDP ratio) starting in 2011 (at the onset of the sovereign debt crisis, the secondwave of the Great Recession, the most severe global economic-financial crisis of the postwar period). Since the second quarter of 2024, France’s public debt-to-GDP ratio has been more than 50 percentage points higher than Ger- many’s. I emphasize that until the onset of theGreat Recession, the two largest economies in the Euro Area had a similar level of public debt-to-GDP, as shown in the previous chart. Currently, France is the third EU country in terms of public debt-to-GDP ratio, after Greece and Italy, with levels of 152.5% and 137.9%, respectively, ac- cording to Eurostat. Inthiscontext,unlessthefiscalconsolidationprocess accelerates in France, the risk perception regarding European public finances may intensify, with spillover effects in countries facing similar chal- lenges. Such a scenario could prompt the European Central Bank to activate, for the first time, the TPI (TransmissionProtection Instrument), created in the summer of 2022. Moreover, I drawattention to the fact that the public debt-to-GDP ratio is also on a rising trend in the world’s two largest economies, theU.S. andChina. Therefore, there is a risk that developments inFrance could trigger a global public-finance crisis, at a time marked by persistent uncertainty, elevated tensions, and the crisis ofmultilateralism. Andrei RADULESCU, Ph.D., Senior International Macroeconomist The public finance crisis in France Source:representationoftheauthorconsideringtheEurostatdatabase,2025 Source:author’srepresentationbasedonEuropeanCentralBankdata,2025 Source:representationoftheauthorconsideringtheEurostatdatabase,2025 T he global securitizationmarket is a multi-trillion-dollar industry, with significant activity inbothEurope and theUnitedStates. Securitization in- volves pooling and repackaging financial assets intomarketable securities or other fi- nancial instruments. This process en- hances banks’ balance sheets by allowing themto transfer rela- ted risks to investors, release capital andunlock additio- nal lending. We have analyzed the core fac- tors in the different regions that attractmoreinvestmentsandex- ploredwhetherahighervolume corresponds to better quality. Landscape andkey highlights Investor appetite for securitizationshowsnosignsof slowingdown, drivenbyattractive risk-adjusted re- turns and volatility reduction, among other factors. In the year 2024, €244.9 billion of securitized prod- ucts were issued in Europe (including the UK) marking a 14.8% increase from the €213.3 billion issued in 2023. In contrast, the issuance of securi- tized products in the US for the same year reached €1,548 billion, an increase of 21% from the €1,283 billion issued in 2023. Another indicator ofmarket appetite is the retention ratio, which fell to 41% in 2024 from55% in 2023 for total issuances in Europe. This significant reduction in retention by issuers reflects market demand and investors’ confidence. (1) Duringthefirsthalfof2025,totalEuropeanissuances amounted to €135 billion, compared to €810 billion in the United States. Rightly highlighted as one of “The root causes of low investment financing in Europe”, the Draghi report notes that European banks cannot rely on securiti- zation to the same extent as theirUS counterparts. In 2024, annual securitization issuance in Europe ac- counted for just 1%of GDP, while the figure for the USwas significantly higher at 5.5%. (2) Thus, thedata indicates that securitizationactivity in the US significantly exceeds transactions in the Eu- ropeanmarket. Maindifferences between the regions impacting securitizedproducts TheEuropeanmarketislessdevelopedthantheUSinterms ofitssizeanddegreeofcompetitiveness,particularlyregard- ing the number of participants. Risk appetite One of the most significant factors is the differing risk appetites of European and US investors, with European investors generallybeingmore conserva- tive. This cautious approach to risk– sharedbyboth investors and regulators – leads to a preference for safer investments inEurope. In contrast, theUS fos- ters a risk-taking and startup culture, supported by a robust ecosystemof joint ventures and public eq- uity markets that drive innovation and a high vol- ume of transactions. Regulatory framework The US operates as a single, unified economy with consistent legal, tax, and regulatory frameworks, fa- cilitating seamless capital flowacross states. In con- trast, Europe is made up of sovereign states, each with its own framework, leading to fragmentation in areas such as insolvency laws, taxation, and in- vestor protection. This creates amore complexnav- igation process due to the fragmented legal jurisdictions inEurope compared to the singular ju- risdiction in the US. In some Eurozone countries, the regulatory frame- work and taxation aremore favorable toward secu- ritization structures than in others. This disparity is reflected in ECB data from Q2 2025, which shows that five countries account for 88%of the total assets in the Euro area. (3) Traditional structures and policy focus In the US, lending is market-based, heavily relying on capitalmarkets andencouragingbroader partic- ipation in business funding. Conversely, Europe is more bank-based, europeanbanksmaintaindeeply rooted relationships with corporate firms and play a dominant role in corporate financing, which is often less suited for funding innovative projects. Additionally, US financial markets thrive in a deregulatory environment that emphasizes market efficiency and innovation. In contrast, Europe priori- tizes financial stability, consumer protection, and prudence, re- sulting in more complex regulations that can sometimes hinder mar- ket dynamism and in- novation. As the global finan- cial hub, the US re- mains in the key position and is miles ahead of Europe in terms of the capital market size, however, Europe holds its own unique position amid geopolitical shifts and core European values, offering a competitive alternative. For example, Eu- rope is taking a leading role in sustainable finance and regulatory frameworks for emerging invest- ments, such as the EUAIAct. Does a higher volume of transactions imply better credit quality? Despite the substantial size of securitized assets in the US, Europe holds a comparative edge in terms of asset quality. In 2024, 87%of issuances in Europewere classified as high quality, of which 60%were ratedAAAand 27% rated AA. In contrast, only 56% of issuances in theUSwere top rated, with 51%ratedAAAand just 5% ratedAA. (4) Additionally, default rates for European securitiza- tions are significantly lower than those forUSsecuri- tizations,withvery fewsenior tranches experiencing losses. By the end of Q3 2024, defaults on US credit card loans reached their highest level since the 2008 financialcrisis,accordingtoanarticleintheFinancial Times based on data fromthe FDIC. (5) According toanApril 2025publicationbyFitchRat- ings , (6) the default forecast for leveraged loans in the US for 2025 is projected tobe between 5.5%and6%, compared to 2.5%to 3%inEurope.Amid the ongo- ing tariff war and the rising risk of stagflation, the likelihood of near-termdefaults in theUS economy is trending upward. Europe’s progress in ESG integration and disclo- sure, compared to theUS, is alsoapositive factor for investors. This is significant, as ESGfactors canpose risks that threatencredit quality.Assessingany risks that could impair a lender’s ability to repay their debt is crucial. Another consideration is the risk versus return dy- namic. TheUSmarket, beingmoremature than the EU, is more competitive, with a higher number of private credit lenders. This competition ultimately lowers yields for investors. Therefore, inaddition to the lower default risk, yields inEurope are compar- ativelymore attractive. Conclusion As Steve Jobs famously said, “One home run is muchbetter than twodoubles!”Quality isundoubt- edly a crucial aspect that provides a healthy boost to theEuropean securitizationmarket; however, the volume of transactions is equally important. For decades, Europe has looked to the US as a benchmark for enhancing its financial infrastruc- ture, particularly incapitalmarket development. In- stead of simply replicating the US model, the EU should focus on cultivating capital markets that re- flect European values and priorities. The European Commission is advancing a set of proposals aimed at revitalizing the EU’s securitiza- tion framework to make it simpler, more effective, and supportive of economic growth. The belief is that existing regulations can be improved and streamlined, facilitating greater investment in the real economy. The European Council, the Eu- rogroup, and the ECB have all recognized the ur- gency of revitalizing the securitizationmarket. While a robust regulatory framework is arguably necessary, the constraints imposed by these regula- tions have been identified within the industry as barriers to growth, leading to a significant contrac- tion inEurope’smarket for securitizeddebt, in stark contrast to the growth observed in the US. There is a genuine opportunity to deepen EU capital mar- kets, enabling investors toplayagreater role in sup- porting the financing needs of the EU economy through capital market mechanisms. Without proactive EU action, issuance and invest- ment barriers will continue to hinder the develop- ment of a vibrant EU securitizationmarket. Papa Saliou DIOP, EY Luxembourg Partner, Banking & Capital Markets, Luxembourg Securitization Leader Sheroff SHAIKH SHAFI, EY Luxembourg Senior Manager, Banking & Capital Markets, Securitization 1) AFMESecuritizationdatareport 2) WorldBankandEYcalculation 3)AssetsandliabilitiesofFVCs|ECBDataPortal 4)AFMESecuritizationdatareport 5) https://www.ft.com/content/c755a34d-eb97-40d1-b780-ae2e2f0e7ad9 6) U.S.,Europe2025LeveragedFinanceDefaultRateForecastsRevisedUp Credit quality of securitized assets Europe vs. US: Does a higher volume imply better quality?