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A senior European Central Bank official dismissed the idea that it might start buying euro zone government bonds after the announcement of early French parliamentary elections caused a sell-off in the country’s debt.
Philip Lane, the ECB’s chief economist, said: “What we are seeing is an overvaluation, but it is not right now in a world of disorderly market dynamics”.
His comments at a Reuters event in London suggest the ECB currently believes there is little reason to consider activating its relatively new but untested emergency bond-buying powers to prop up eurozone debt markets.
Borrowing costs for European governments have risen since French President Emmanuel Macron called snap parliamentary elections for June 9 after his party lost heavily in EU elections, sparking fears it could lead to another eurozone debt crisis.
Polls suggest the far-right Rassemblement National Marine Le Pen could win next month’s election, and the new left-wing bloc could be the main opposition party. That raises concerns that France could go on a populist spending spree, adding to the country’s already high debt and fueling tensions between Paris and Brussels.
Lane’s comments were echoed by ECB President Christine Lagarde.
“Price stability goes hand in hand with financial stability,” Lagarde said Monday during a visit to a quantum computer research facility in Massy, southwest of Paris. “We take care of the good functioning of the financial markets and . . . we continue to be attentive, but we limit ourselves to that.”
Some analysts believe that intensifying bond sales would prompt the ECB to respond. The central bank granted itself the power to buy an unlimited amount of eurozone country bonds in 2022 to counter an unwarranted sell-off, but the scheme has not been activated and there is uncertainty over the conditions that would entail its use.
Jörg Krämer, chief economist at Germany’s Commerzbank, said: “In an emergency, the ECB would intervene. He would massively buy government bonds and stabilize the monetary union, as happened in 2012.
Lane said the ECB had “made it clear” that it would not tolerate market panic causing euro zone bond markets to collapse due to investors selling bonds indiscriminately as prices fall in a way that “distorts monetary policy”.
But he declined to comment specifically on France, comparing the scenario of “disorganized market dynamics” to a sell-off caused as investors “reassessed the fundamentals”.
The ECB’s “transmission protection tool,” which it announced when it began raising interest rates, specifies that it “may be activated to counter unwarranted, disorderly market dynamics” that interfere with 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’ 2022 mini-budget.
The spread between benchmark French and German yields – a market barometer for the risk of holding French debt – was 0.76 percentage points on Monday. That was slightly down from Friday’s level of 0.82 points, the highest since Le Pen reached the second round of the 2017 presidential election.
Le Pen’s victory in next month’s parliamentary elections could raise France’s 10-year borrowing costs by another 0.5 percentage point, according to analysts at German insurer Allianz. He added that any sell-off was likely to be limited by the “dampening effect” of potential ECB measures, which have the ability to “calm markets”.
France’s public debt has risen to more than 110 percent of its gross domestic product – one of the highest levels in Europe – and it has been slower than most other countries to reduce its budget deficit after reaching 5.5 percent last year.
The eurozone’s second-largest economy is one of 11 EU members expected to be included by the European Commission in the excessive deficit procedure, which sets out measures to reduce debt under the bloc’s new fiscal rules.