The ECB’s chief economist downplays the need to intervene in the French bond market

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A senior European Central Bank official has dismissed the idea that it could start buying euro zone government bonds after the announcement of French parliamentary elections quickly sparked a wave of selling. relieve this country’s debt.

“What we are seeing is a repricing but it is not in the current world of chaotic market dynamics,” said Philip Lane, the ECB’s chief economist.

His comments, at a Reuters event in London, indicate that the ECB now believes there is little reason to consider activating its relatively new but untested emergency bond-buying powers to support Eurozone debt market.

Borrowing costs for European governments has increased since French President Emmanuel Macron called early parliamentary elections on June 9 after his party suffered a heavy defeat in the EU elections, raising fears that this could lead to a Another debt crisis in the Eurozone.

Polls suggest Marine Le Pen’s far-right Rassemblement National party could win election next month and a new left-wing bloc could be the main opposition party. This has raised concerns that France could continue its populist spending, which would push up the country’s already high debt levels and fuel tensions between Paris and Brussels.

Lane’s comments were supported by ECB president Christine Lagarde.

“Price stability goes hand in hand with financial stability,” Lagarde said Monday while visiting a quantum computing research site in Massy, ​​southwest of Paris. “We pay attention to the good performance of financial markets and . . . We are continuing to pay attention, but it is limited to that.”

The Government's fiscal balance chart (% of GDP) shows that France is struggling to reduce its budget deficit

Some analysts say the increased bond sell-off will force the ECB to react. The central bank empowered itself in 2022 to buy an unlimited amount of a Eurozone country’s bonds to counter unwarranted sell-offs, but the plan has not yet been activated and is not be sure of the conditions that will require its use.

Jörg Krämer, chief economist at German bank Commerzbank, speak: “In an emergency, the ECB will intervene. It will massively buy government bonds and stabilize the currency union as it did in 2012.”

Lane said the ECB had “made it clear” that it would not tolerate the market panic that caused the collapse of the eurozone bond market due to investors selling bonds indiscriminately because prices are falling in a “monetary policy breaking” way.

However, declining to comment specifically on France, he contrasted this scenario of “disorderly market dynamics” with the sell-off that occurred when investors “reassessed fundamentals.” .

“of the ECBtransmission protection device”, announced at the start of the interest rate hike, specified that it “could be triggered to counter unwarranted, chaotic market dynamics” that hinder monetary policy.

French Finance Minister Bruno Le Maire warning last week that an RN victory could lead to a “debt crisis” similar to the market chaos caused by former UK prime minister Liz Truss’s mini-budget in 2022.

The chart of general government debt (% of GDP) shows that France's debt is rising well above the EU limit - unlike Germany

The spread between French and German benchmark yields – a market barometer of the risk of French debt holdings – was 0.76 percentage points on Monday. That’s down slightly from Friday’s 0.82 point, the highest since Le Pen reached the second round of the 2017 presidential election.

A Le Pen victory next month Congress voting According to analysts at German insurance company Allianz, it could push up the cost of France’s 10-year loan by 0.5 percentage points. It added that any sell-off could be averted by the “mitigating impact” of potential ECB measures that could “calm markets”.

France’s national debt has risen to more than 110% of gross domestic product – one of the highest in Europe – and the country has been slower to reduce its budget deficit than most after reaching 5.5%. last year.

The Eurozone’s second-biggest economy is one of 11 EU members where the European Commission is expected to put under excessive deficit procedure – stipulating debt relief measures under the bloc’s new fiscal rules .

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