French central bank: ECB does not yet need to intervene despite interest rate stress
Interest rate stress in France is increasing, but according to the head of the local central bank, the ECB does not need to intervene. Here's what you need to know.
The French bond market is under heavy pressure, but according to central bank president Emmanuel Moulin, intervention by the ECB is not necessary for the time being.
The French 10-year interest rate rose again to around 4.87 percent on Wednesday. At the same time, the interest rate differential with German government bonds is around 1.4 percentage points, after just above 1.5 percentage points last week. These were levels that have hardly been seen since the euro crisis.
According to Moulin, it is not the ECB's job to solve French fiscal problems. The central bank must first and foremost ensure price stability. France will therefore have to put its public finances in order itself.
The French government wants to reduce the budget deficit from about 5.4 percent of GDP in 2026 to 5 percent in 2027. Precisely uncertainty about its feasibility causes investors to demand a higher interest payment.
Moulin warned earlier that France could eventually be “strangled by interest rates” if the country does not address its budget problems.
Interest rate stress also plays an increasingly important role in the run-up to the French presidential elections of 2027. Marine Le Pen has argued for consultations on possible ECB support once the French budget improves.
Jean-Luc Mélenchon, on the other hand, opted for much more radical solutions and spoke, among other things, about cancelling parts of the French national debt. He also attacked Moulin hard because of his warnings about French public finances.
For the time being, French stress still seems manageable. But France now has about 3.5 trillion euros of public debt and interest rates are approaching 5 percent. As a result, interest expenses increase quickly.
The real limit is probably at risk of infection. If the sell-off spills over into other major European bond markets and begins to disrupt the functioning of the financial system, pressure on the ECB could increase rapidly.
For the time being, Frankfurt says it does not have to save anything. But the longer the French interest rate stays around these levels, the more difficult that position becomes to sustain.