The financial system in force today is the result of a policy of transformation initiated in the 1980s to prepare for entry into economic and monetary union. At that time, the financial system was mainly based on the activities of banks and, more generally, on credit.
The high growth rates and the sustained investment speed they imply exceeded the equity held by firms, creating a strong demand for financing from companies. Financial markets only partially met the demand for the most important ones.
Therefore, it was the banks that met the financing demands of the companies by providing their own liquidity by constantly resorting to refinancing.
This system, called the debt economy in his works, should not be confused with the debt economy system, which is a debt economy in which the debt economy does not necessarily exist. Debt and continuous refinancing are key features of the central bank and banks' debt economy.
This growth-prognostic financing system has been largely manipulated both by the way interest rates are transmitted and by the existence of specialized cycles marked by certain interest rates.
Banks' demand for refinancing, like corporations' demand for financing, was highly insensitive to the interest rate, and thus the instrument of monetary regulation was quantitative.
The increase in credit volume was controlled by the practice known as credit control. For example, it has been made more flexible with certain policies to support exports or housing finance.
The aim of the reform, based on the work of the General Planning Commission, was to establish a decentralized capital market large enough to allow it to cope with international capital movements.
From this, companies would derive the possibility of accessing a wider capital market where the interest rate would be a real price. It will be easier for companies to create equity capital and access long-term resources.
The financial burden on businesses was not a major concern. Because inflation has significantly lowered interest rates. So much so that the real interest rate was sometimes negative. It was rather a matter of adapting the economy, and especially the capital markets, to the opening of economies.
As with any economic policy action, this change has led to adaptations. Banks and other financial intermediaries multiplied financial innovations.
Companies have had to contend with both the change in their financing structure and its price, especially since the de facto disappearance of inflation has left them facing high interest rates.
Investment has not benefited from the modernization and diversification of the financial system as much as reform supporters had hoped. However, the financial management of companies has been radically changed and has become a source of profitability.
The transformations took place in a deeply altered environment regarding the determination of the basic variables of the economy, namely interest rates. Here we will try to present the elements of the special situation of the economy.
There is a transformation of the financial system organized by public authorities in response to the constraints of the economic environment. According to the generally accepted classification, it has resulted in the transition to a financial system that falls within the scope of financial market economy.
The place that capital markets occupy today in financing companies is the result of an evolution desired and organized by public authorities.
Equity Capital Economy
The foreseeable transformation that took place in the economic environment with the establishment of the single market made it necessary to question the organization of finance. The economy has closed in the sense that it operates with tight exchange controls when exporting.
This had a dual aspect:
- It made it possible to control the movement of capital and thus limit the still active speculation against the franc.
- It also restricted the contribution of foreign capital to stock markets.
The purpose of the reforms implemented by successive governments, the reform of the finance of the economy, is clearly defined. The aim was to achieve a unified capital market that spanned from day to day and over very long periods of time.
This approach has been accompanied by a sustained process of financial innovation, which the Government sets an example with its borrowing techniques.
The expected benefits were on two levels:
- Increasing prices in the capital market,
- Increasing financing resources for companies, especially with the contribution of foreign capital.
The ultimate goal was to establish a capital economy, that is, an economy in which companies no longer depend on bank debt, but in which savers invest with the contribution of capital.
This capital contribution does not increase the company's debt and the market decides the validity of the investment.
An active financial market assumes that operations can be carried out at any time and that all financial operators have access to each market segment, implying money market reform.
In short, the development of markets relies on a rapid process of financial innovation, in which the state becomes more active as economic constraints increase.