The European Central Bank (ECB) is expected to keep interest rates unchanged at its next meeting, despite rising government bond yields increasing borrowing costs across the eurozone. ECB President Christine Lagarde has emphasized that France must address its debt issues domestically. On Friday, the yield on France's 10-year government bond surpassed 5%, the highest since 2002, with a gap of over 170 basis points compared to German bonds. The 30-year yield reached 5.5%, with an even wider gap of 184 basis points.
France's budget negotiations remain contentious, with €43 billion in proposed spending cuts lacking legislative support. Moody's is expected to downgrade France's credit rating from Aa3 to A1 on Friday evening, aligning it with ratings from S&P and Fitch. Civil unrest is escalating, with protests planned this weekend and unions calling for a general strike on November 5.
Analysts suggest that rising bond yields are effectively tightening financial conditions, akin to an ECB rate hike. Carsten Brzeski of ING noted that French yields reflect a 50 basis point hike, with the bond market 'taking over the ECB's job.' The ECB has not ruled out intervention but insists fiscal reforms in France are the primary solution.
Potential ECB intervention tools include the Transmission Protection Instrument (TPI) and Outright Monetary Transactions (OMT). However, France's high debt-to-GDP ratio of 119.1% and budget deficits complicate eligibility. Brzeski anticipates the ECB will pause bond holdings reduction as a temporary measure, with TPI as a last resort if turmoil spreads.