The European Central Bank policymakers have confirmed that there is currently no plan to discuss emergency purchases of French bonds, despite the recent turmoil in the French financial markets. The sell-off in French government bonds last week has raised concerns among investors, with the risk premium over safer German paper reaching levels not seen since the 2011 euro zone debt crisis.
According to five sources within the ECB, the responsibility to reassure investors lies with French politicians, who need to demonstrate a commitment to running a sensible economic policy. The ECB policymakers believe that it is not their role to intervene before a new French government is formed and fiscal plans are announced. The sources emphasized that it is crucial for French leaders to address the concerns of the markets.
The ECB’s Transmission Protection Instrument (TPI) allows for the purchase of unlimited amounts of bonds from countries facing market pressure, as long as they comply with the EU’s fiscal rules. While some governors expressed unease about the financial turmoil in France, others drew parallels to Italy’s situation in 2022, when a change in government led to a more cooperative approach towards European institutions.
French Finance Minister Bruno Le Maire has warned about the possibility of a financial crisis if the far-right National Rally party wins in the upcoming elections. The party’s proposed policies, including a “France first” economic approach, have raised alarms among investors. The spread between French and German bond yields has widened significantly, reflecting the growing uncertainty in the markets.
ECB President Christine Lagarde, a French national herself, has downplayed the significance of the EU’s fiscal rules in determining TPI eligibility. She emphasized the ECB’s commitment to maintaining price stability and achieving its inflation target. Lagarde refrained from commenting on the possibility of using TPI for France, suggesting that the focus should be on controlling inflation.
Investors are demanding a higher premium for lending to France compared to Germany, reflecting their concerns about the economic and political stability in France. The spread between Italian and German bond yields has also widened, although it remains lower than levels seen in the past. The market volatility in both countries highlights the challenges faced by the euro zone as a whole.
While the ECB remains vigilant about the developments in the French bond market, it has refrained from intervening at this stage. The onus is on French policymakers to address the concerns of investors and demonstrate their commitment to stability and growth. The ECB stands ready to act if necessary, but for now, it is up to the political leadership in France to restore confidence in the markets.