Can France rely on the ECB if its bonds blow up?
When you say TPI…
The ECB created the TPI in 2022, to pre-empt the risk that financial markets would speculate on the eurozone’s breaking up under the strain of the first major monetary policy tightening cycle since 2008.
The tool allows the ECB — under certain conditions — to buy the governments bonds of individual member states to keep a lid on borrowing costs, thereby ensuring that the eurozone doesn’t end up with loan and deposit rates that vary sharply across the region. This goal is referred to as the smooth, or even, transmission of monetary policy.
At the time of the TPI’s creation, the risk premium, or ‘spread’ attached to benchmark 10-year Italian bonds — that is, the extra return demanded by investors to hold Italian debt rather than a safer credit such as Germany — had risen above 2 percentage points. Even so, the ECB refrained from intervening.
Are we there yet?
Not yet. Today, the spread of France’s benchmark 10-year OAT over the comparable Bund is 85-87 points, well below the level previously experienced by Italy, let alone by countries such as Greece and Portugal, when they had to be bailed out 14 years ago. That suggests that official interest rates are still ‘transmitting’ their signal more evenly than they did back then.
But the TPI isn’t just about absolute, or even relative levels of bond yields. It’s about how quickly they move, and whether the ECB considers such moves justified. The central bank has said it will use the TPI “to counter unwarranted, disorderly market dynamics.”
So far, market dynamics have been neither unwarranted nor disorderly: Spreads widened sharply in June as President Emmanuel Macron lost control of France’s parliament to hard-left and hard-right parties opposed to his budget policies, among other things. They have fluctuated in a narrow range since then as the market has waited to see whether Prime Minister Michel Barnier could somehow push through a budget for next year that would cut the deficit by an amount acceptable to Brussels. But as the moment of truth approaches, anxiety has increased and pushed the Bund-OAT spread as wide as 90 basis points, the most since 2012.
