The return to surpluses for Unemployment Insurance, as confirmed by the financial projections published by Unédic in early June, occurs in a context of high indebtedness. Indeed, the COVID-19 crisis has left deep traces in the system's finances, especially the partial unemployment activity, which generated €11.7 billion in expenses and a €3 billion decrease in revenue due to lost earnings between 2020 and 2022.
To support the unemployment insurance system, the Board of Directors approved an increase in the size of the long-term bond program to €60 billion on January 28, 2021, up from €50 billion at the end of 2020 and €34 billion at the end of 2019.
In 2021, Unédic issued eight bonds in the financial markets, totaling €12.5 billion, of which €10 billion were in the form of Social Bonds.
This financing program should be seen in the context of Unédic's historical presence in the financial markets. While not as high as in 2020, the issuance of medium and long-term debt in 2021 remained at a very high level in the history of the system.
This sudden increase in the system's debt allowed for the continuity of payment of traditional unemployment insurance benefits and emergency measures, needs that the system's resources - derived from employee contributions and income from work - could not have covered at that time. Unédic was able to address these needs through three financing programs.
Unédic's financing tools
Unédic funds itself by utilizing three programs for issuing fixed-rate euro-denominated debt
- The NEU CP (Negotiable EUropean Commercial Paper) program: Short-term negotiable debt instrument (up to one year), used to cover short-term cash flow needs. After a period of high demand in the second quarter of 2020, activity in this program decreased but remained higher than it was before the crisis. Emissions are conducted almost daily to ensure the liquidity of the securities and to cover Unédic's short-term cash flow requirements.
- The NEU MTN (Negotiable EUropean Medium Term Note) program: Flexible medium-term negotiable debt instrument, serving as a complement to other financing programs. This program was used in May 2020 to issue Unédic's first Social Bond. It was not utilized in 2021 and is not expected to be used in 2022.
- The EMTN (Euro Medium Term Note) program: Financing for Unemployment Insurance's debt, enabling coverage of projected deficits and refinancing of bond borrowings. Bond borrowings are reserved for long-term maturities (up to a maximum of 15 years) and require explicit state guarantee. This guarantee is authorized by a provision in the finance laws, and bond issuances can be conducted following the publication of an order from the Minister of Finance.
The gross debt of the system, which stood at nearly €41 billion at the end of 2019, is now close to €68 billion at the end of 2021 (with a net debt of €63.6 billion). Unédic had €4.1 billion in cash reserves at the end of 2021 to anticipate its very short-term cash outflow needs.
A controlled cost of debt for Unemployment Insurance.
Due to the counter-cyclical management model of Unemployment Insurance, the debt of Unédic is accumulated when the economic situation deteriorates. In recent years, the particularly favorable level of interest rates on Unédic's borrowings can be attributed to the implementation of low-interest rate monetary policies by the European Central Bank and the ability of social partners to establish a financing strategy that is transparent to investors.
This financing strategy implemented between 2009 and 2021 will help maintain a low-interest burden, provided that management surpluses allow for the repayment of this low-cost debt. Conversely, a rise in interest rates coupled with significant reliance on financial markets will substantially increase interest expenses, limiting the ability of the regime's managers to finance employment support programs.
Today, the average interest rate for all financing instruments stands at less than 0.5%.
In order to manage the refinancing of borrowings during deficit periods, two identified risks are controlled:
By distributing the outstanding amounts across all years of the repayment schedule of Unédic's debt (with a maximum maturity of 15 years since 2017), the amount of each issuance does not exceed €4 billion to control refinancing risk.
By taking advantage of the low-interest rate environment to issue fixed-rate debt with long maturities secures interest rate risk, with management surpluses enabling the repayment of maturing borrowings without the need to renew a significant portion of the debt at a higher interest rate.
The magnitude of the economic shock caused by the COVID-19 crisis has disrupted the financial situation of the system. The outstanding amount of medium and long-term debt (NEU MTN and EMTN programs) of Unédic increased substantially, rising from €35 billion at the end of 2019 to €60 billion at the end of 2021.
Despite the impact of this shock on Unédic's finances, the refinancing risk remains controlled today, thanks to a weighted average debt maturity of nearly 7 years and forecasted management surpluses that limit the need for Unemployment Insurance financing in the coming years.
However, the rapidly rising interest rate environment calls for caution on the part of the regime's managers.
A financial strategy that adapts to an uncertain economic environment
"Regardless of the economic situation, Unédic always adapts, thanks to its flexibility. In the second half of 2021, we were able to manage our debt by adjusting our financing needs very responsively, thanks to our three annual financial forecasts. This agility is complemented by our deep understanding of the labor market. We are active observers, and this is essential for managing the system," noted Christophe Valentie, CEO of Unédic in the 2021 Activity Report, published last March.
While 2022 was expected to continue the economic recovery that began in 2021, the war in Ukraine since February 24 and the resurgence of the COVID-19 pandemic (strict lockdowns in Asia) have generated inflationary pressures worldwide. Faced with this widespread price increase, central banks are gradually ending the low-interest-rate monetary policies put in place to address the crisis. The European Central Bank, for instance, announced on July 21 that it was raising its key rates by 50 basis points (0.50%), marking the end of negative interest rates in Europe. This is also the first rate hike in Europe since 2011.
The global economic upheaval has created uncertainties regarding the finances of Unemployment Insurance in the months and years ahead. After a year in 2020 where the unemployment insurance system saw its financial balance deteriorate by €17.4 billion, the financial projections published in June 2022 anticipate a €9.3 billion deterioration in 2021, followed by a return to surpluses from 2022 onward (€2.5 billion in 2022, €3.1 billion in 2023, and €4.2 billion in 2024).
The economic recovery in the second half of 2021 and the robust performance of the labor market in France in the first half of 2022 - despite uncertainties related to the geopolitical, economic, and health context - have resulted in a decrease in Unédic's actual financing needs for the year 2022. According to the latest financial projections, this need would amount to €1.6 billion after considering the repayments of medium and long-term borrowings maturing (€4.1 billion).
As a result of these reduced needs for 2022, only one bond issuance (EMTN) was conducted on May 10 in the format of a Social Bond, with a value of €1 billion. This issuance was well-received, thanks to strong demand from high-quality investors.
In collaboration with Parliament and government ministries, Unédic is supporting this improvement in its financial outlook and reaffirms its commitment to effective management, ensuring the continuity of Unemployment Insurance's missions in the face of uncertainties.