French stocks and bonds have been hit on Tuesday as France’s minority government looks increasingly likely to collapse next month. While investors mull how this will play out, over at Berenberg economists say the likelihood of the ECB intervening to stabilise any market fall-out is low.
Shares in Societe Generale, Credit Agricole and BNP Paribas are all down 4.5-6.8% while the CAC 40 is the worst performing index in Europe on Tuesday- off 1.5%. Meanwhile France’s 10-year yield soared to its highest since March.
“Investors are rightly questioning the stability of French public finances,” writes Berenberg economist Salomon Fiedler in a note, pointing out that at 3.5%, yields on French 10-year government bonds are higher than those of previous crisis countries like Spain and close to those of Italy.
But intervention is unlikely by the ECB, he adds, even while admitting the central bank in the past has given itself “enormous leeway” to intervene in markets to bring down financing costs for certain governments if it deems it necessary to do so.
“While the ECB has not included hard-and-fast requirements in the Transmission Protection Instrument (TPI) it set up in July 2022 (but has not used so far), it would be extremely difficult to explain why France now warrants its activation,” says Fiedler.
The ECB’s Transmission Protection Instrument (TPI) allows the central bank to purchase 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.
Fiedler flags that only countries with a sustainable fiscal policy are supposed to be eligible for the TPI. Berenberg’s view is that France’s fiscal posture is unsustainable, primarily due to substantial government overspending.
“Further, in contrast to the low-inflation, low-interest-rates environment before the pandemic crisis, the costs of an ECB intervention in France – in the form of higher financing costs for other Eurozone countries – would now be much more obvious, adding to the political difficulty,” he adds.
Source: Reuters (Lucy Raitano)
