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A senior European Central Bank official has dismissed the idea that it could buy euro zone government bonds after the announcement of snap French parliamentary elections sparked a sell-off in the country’s debt.
Philip Lane, the ECB’s chief economist, said: “What we are seeing is a repricing, but that is not the case at the moment in the world of disordered market dynamics.”
His comments at a Reuters meeting in London suggest the ECB currently believes there is little reason to consider activating its relatively new, but untested, emergency bond purchasing powers to support eurozone debt markets.
Borrowing costs for European governments have soared since French President Emmanuel Macron called early parliamentary elections on June 9 after his party lost badly in the EU elections. This raised fears that this could lead to a new debt crisis in the eurozone.
Polls show Marine Le Pen’s far-right Rassemblement National could win elections next month and a new left-wing bloc could be the main opposition party. This raises concerns that France could embark on a populist spending spree, which would drive up the country’s already high debt levels and fuel tensions between Paris and Brussels.
Lane’s comments were backed by ECB President Christine Lagarde.
“Price stability goes in parallel with financial stability,” Lagarde said on Monday during a visit to a quantum computing research center in Massy, southwest of Paris. “We pay attention to the proper functioning of the financial markets, and . . . We remain attentive, but it is limited to that.”
Some analysts think an intensification of the bond sell-off would force the ECB to respond. The central bank has given itself the power to buy unlimited amounts of a eurozone country’s bonds in 2022 to counter an unwarranted sell-off, but the plan has not been activated and there is uncertainty over the conditions governing its use would entail.
Jörg Krämer, chief economist at German lender Commerzbank, said: “In an emergency, the ECB would intervene. It would buy government bonds en masse and stabilize the monetary union, just like in 2012.”
Lane said the ECB has “made it clear” that it would not tolerate a market panic that would cause a collapse in eurozone bond markets as investors indiscriminately sell bonds as prices fall in a way that “distorts monetary policy.”
But declining to comment specifically on France, he contrasted this scenario of “disorderly market dynamics” with a sell-off caused when investors “reassessed fundamentals.”
The ECB’s “transmission protection instrument,” which it announced when it started raising interest rates, specifies that it “can be activated to counter unwarranted, disorderly market dynamics” that distort monetary policy.
French Finance Minister Bruno Le Maire warned last week that an RN victory could lead to a “debt crisis” similar to the market chaos sparked by former British Prime Minister Liz Truss’s 2022 mini-budget.
The difference between French and German interest rates – a market barometer of the risk of holding French government bonds – was 0.76 percentage points on Monday. That was slightly lower than Friday’s level of 0.82 points, the highest since Le Pen reached the second round of the 2017 presidential election.
A victory for Le Pen in next month’s parliamentary elections could boost France’s 10-year borrowing costs by another 0.5 percentage points, according to analysts at German insurer Allianz. It added that any sell-off would likely be kept in check by the “dampening effect” of potential ECB measures that have the ability to “calm the markets.”
France’s national debt has risen to more than 110 percent of gross domestic product – one of the highest levels in Europe – and the country has reduced its budget deficit more slowly than most other countries, after reaching 5.5 percent last year.
The eurozone’s second-largest economy is one of 11 EU member states that the European Commission is expected to include in its excessive deficit procedure, setting out measures to reduce debt under the bloc’s new fiscal rules.