ECB Reluctant to Intervene in French Bond Market Amid Fiscal Concerns

The European Central Bank's Transmission Protection Instrument is unlikely to be triggered for France due to its excessive deficit procedure status and failure to meet criteria for sound macroeconomic policies.

Rising concern over France's public finances, including high deficits and rising debt, has pushed the country's borrowing costs higher across the euro zone bond market. The widening gap between French and German bond yields is reviving debate over whether the ECB could intervene.

The premium on French bonds versus German bonds rose to 131 basis points, a 14-year high, amid investor concerns over France's fiscal situation and election uncertainty before next year's presidential election.

ECB criteria make intervention difficult due to France's excessive deficit procedure status and failure to meet requirements for sound macroeconomic policies. The bank's Transmission Protection Instrument allows it to buy unlimited amounts of bonds from a euro zone country facing an unwarranted and disorderly tightening in financing conditions, but this would require the country to meet certain criteria.

The move in spreads does not clearly fit the ECB's threshold for market disorder, as the increase has unfolded in relatively measured steps and broadly tracks the flow of fiscal and political news. French central bank chief Emmanuel Moulin has also warned against assuming the ECB will step in.