ECB chief economist downplays need to intervene in French bond market

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A senior European Central Bank official has dismissed the idea that it could start buying Eurozone government bonds after the announcement of a snap French parliamentary election caused a sell-off in the country’s debt.

Philip Lane, chief economist of the ECB, said: “What we are seeing is a repricing but it is not in the world of disorderly market dynamics right now”.

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

Borrowing costs for European governments have surged since French President Emmanuel Macron called snap parliamentary elections on June 9 after his party lost heavily in EU elections, stirring fears that this could lead to another Eurozone debt crisis.

Polls indicate Marine Le Pen’s far-right Rassemblement National could win next month’s election and a new leftwing bloc could be the main opposition party. This is raising concerns that France could go on a populist spending spree, which would push up the country’s already elevated debt levels and fuel tensions between Paris and Brussels.

Lane’s comments were backed up by ECB president Christine Lagarde.

“Price stability goes in parallel with financial stability,” Lagarde said on Monday while visiting a quantum computing research site in Massy, southwest of Paris. “We are attentive to the good functioning of financial markets, and . . . we’re continuing to be attentive, but it’s limited to that.”

Some analysts think that an intensification of the bond sell-off would force the ECB to respond. The central bank gave itself powers in 2022 to buy unlimited amounts of a Eurozone country’s bonds to counter an unwarranted sell-off, but the scheme has not been activated and there is uncertainty over the conditions that would entail its usage.

Jörg Krämer, chief economist at German lender Commerzbank, said: “In an emergency the ECB would intervene. It would massively buy government bonds and stabilise the monetary union as it did back in 2012.”

Lane said the ECB had “made it clear” it would not tolerate market panic causing a meltdown of Eurozone bond markets owing to investors selling bonds indiscriminately because prices are falling in a way that “disrupts monetary policy”. 

But, declining to comment specifically on France, he contrasted this scenario of a “disorderly market dynamic” with a sell-off caused when investors were “reassessing fundamentals”.

The ECB’s “transmission protection instrument”, which it announced as it started to raise interest rates, specifies that it “can be activated to counter unwarranted, disorderly market dynamics” that interfere with monetary policy.

France’s finance minister Bruno Le Maire warned last week that a victory by the RN could lead to a “debt crisis” similar to the market chaos fuelled by former UK prime minister Liz Truss’s mini-budget in 2022.

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

A Le Pen victory in next month’s parliamentary election could push up French 10-year borrowing costs by another 0.5 percentage points, according to analysts at German insurer Allianz. It added that any sell-off was likely to be contained by the “dampening effect” of potential ECB measures that have the ability to “calm markets down”.

France’s national debt has surged to more than 110 per cent of its gross domestic product — one of the highest levels in Europe — and it has been slower to reduce its budget deficit than most other countries after it reached 5.5 per cent last year.

The Eurozone’s second-largest economy is one of 11 EU members that the European Commission is expected to include in its excessive deficit procedure — stipulating measures to bring its debt down under the bloc’s new fiscal rules.