The eurozone’s finance ministers looked at France’s bond crisis on Thursday and walked away. At their monthly meeting in Luxembourg, Eurogroup ministers agreed that no European institution is prepared to intervene to bring down France’s borrowing costs, and that the political uncertainty French politicians created must be resolved by French politicians. The message to Paris: pass the 2027 budget. One senior eurozone official told Reuters the answer on intervention was a clear no and that “France has all the means to respond.” A second added: everybody should do their own job, the ECB keeps price stability, governments keep fiscal stability.
The ECB side of the wall is the transmission protection instrument, the TPI, which lets the ECB buy a member state’s bonds without limit if yields move in an unjustified way. But it requires conditions France cannot meet: a deficit at or below 3 percent of GDP and debt at or below 60 percent of GDP. France ran a 5.1 percent deficit with 115.6 percent debt last year. Lagarde told the ministers the ECB has tools for market turmoil but only under strict criteria, a negative read on any rescue bid. Eurogroup president Kyriakos Pierrakakis said ministers trust France’s fiscal commitment, while calling for prudence: he noted the EU’s public deficit has risen from 1.7 to 3.5 percent of GDP over a decade while average 10-year sovereign yields climbed from 1.1 to 4 percent, and defense spending doubled to 2.4 percent of GDP.
The numbers behind the refusal are ugly. French 10-year yields have jumped nearly 80bp since early September to just short of 5 percent, the highest since July 2002, and the OAT-Bund spread broke 150bp on October 2, the widest since the 2010 to 2012 euro crisis. Thirty-eight percent of French corporate bonds now trade wider than the sovereign, 18 times the share at the start of the year, as investors price France like the periphery rather than the core. With the National Assembly debate starting October 13 and a formal budget vote October 20, the spread will keep tightening French financial conditions faster than any ECB decision.