European Central Bank: Conditional support and French risks – Rabobank

Rabobank's Senior Economist Maartje Wijffelaars describes widening French spreads and notes 38% of French high-grade corporate debt now yields less than government bonds. She argues most spread widening may be over as France is seen as too big to fail and ECB tools exist. She outlines ECB conditionality for TPI and stresses France’s need for a credible budget.

France spreads and ECB toolkit

"In Europe, the OAT-Bund spread edged up to close to last week’s post GFC-peak and 38% of French high-grade corporate debt is now said to yield less than government bonds owing to lower perceived credit risk. The French government has yet to reassure markets on its budget plans amid growing protests and political uncertainty ahead of next year’s presidential election."

"Still, although risks remain, most of the widening appears to be over for now. The spread seems to have become attractive to buyers of French debt, given the belief that France is too big to fail and the availability, if needed, of instruments and programmes created since the previous debt crisis, including the ESM, OMT and TPI. Against this backdrop, ECB President Lagarde reiterated that the ECB has instruments to counter unwarranted market dynamics, while Governing Council member Moulin and French finance minister Lescure said the conditions for direct intervention are not currently met."

"Lagarde’s comments were expected, as we wrote in Monday’s Credit Compass. For now, ECB action is most likely to take the form of guidance, with policy intervention still unlikely. Other eurozone countries may meet TPI conditionality, but intervention is not yet warranted based on current spreads."

"For France to become eligible, the ECB would probably first require prove of a credible budget. If France were seen as complying with the structural expenditure path under EU budget rules and markets still failed to respond favourably, the ECB might step; but only after exhausting verbal intervention and pausing QT."

"September’s ECB minutes showed policymakers weighing another rate hike against growth risks. They viewed a 2.5% rate as neutral, cited economic resilience, and kept communication deliberately non-committal. Future decisions will consider long-term yields, which could materially affect growth and inflation and have risen since the meeting."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)