ECB in no rush to discuss French bond rescue

By Balazs Koranyi and Frank Siebelt

FRANKFURT (Reuters) – European Central Bank policymakers have no plan to discuss emergency purchases of French bonds and still think it is for French politicians to reassure investors spooked by the prospect of a far-right government, five sources told Reuters.

French financial markets endured a brutal sell-off late last week as investors cut their positions ahead of a snap election that might give a majority to the far right, leading some analysts to speculate about an ECB intervention.

But five ECB policymakers, speaking on condition of anonymity given the sensitivity of the situation, said they hadn’t discussed activating an emergency bond-buying scheme to support French debt, nor do they currently plan to do so.

The sources expressed varying degrees of concern about the magnitude of the selloff in French government bonds, which saw their risk premium over safer German paper rise by the most since the 2011 euro zone debt crisis.

But they generally agreed it was for French politicians to convince investors that they would run a sensible economic policy. Two sources even suggested the ECB should not intervene before a new French government is formed and fiscal plans announced.

An ECB spokesperson declined to comment.

The ECB’s Transmission Protection Instrument (TPI) allows it to buy unlimited amounts of bonds from a country that finds itself under market pressure, but only for as long as it complies with parameters including the European Union’s fiscal rules.

Still, some governors were unnerved by the notion of financial turmoil brewing in France, which was until recently regarded as the euro zone’s second pillar of stability after Germany but is now having its own fiscal woes.

French Finance Minister Bruno Le Maire has warned that the euro zone’s second-biggest economy was at risk of a financial crisis if the far right wins in the June 30 and July 7 elections.

Marine Le Pen’s eurosceptic National Rally (RN), which is leading in opinion polls, is calling for a cut in the state pension age, reductions in energy prices, increased public spending and a protectionist „France first” economic policy.

ITALIAN PRECEDENT

Some governors likened France’s situation to that faced by Italy in the summer of 2022, when Giorgia Meloni’s centre-right coalition appeared poised to win general elections.

After her election win, Meloni toned down her bellicose approach towards European institutions and the ECB governors hoped Le Pen and her party would do the same.

Italy and France are both running a higher deficit than EU rules allow, meaning they will be forced to tighten their purse strings via a so called „excessive deficit procedure” from the European Union.

ECB President Christine Lagarde, herself a Frenchwoman, appeared to play down the importance of that rule earlier this year, saying it was just „an alternative condition” to determine TPI eligibility.

Asked about the notion of using TPI for France on Friday, Lagarde merely said it was „the duty of the European Central Bank to … keep inflation under control and back to target”.

Investors were demanding an 80 basis-point premium for lending to AA-rated France over triple-A Germany for 10 years as of the market’s close on Friday.

The spread between BBB-rated Italy and Germany, which also widened in recent days, was 157 basis points on Friday – still a far cry from the 250 points touched in 2022.