This morning the bond market it is more relaxed and the increase in interest differentials and yields has slowed the pace. But investors are not convinced of clear weather. There authorities' toolbox is ready and they could shoot protective measures if things get worse in France. Investors are alert and starting to think about thresholds to be kept under observation.
French markets last week suffered a sharp sell-off and political uncertainty triggered the biggest weekly jump to highs on government bond yields, which represents investors' demand for a premium on holding French public debt. since the 2011 eurozone debt crisis. And bank stocks have also collapsed.
French Finance Minister fears a financial crisis in France
La concern, despite the brightening up this morning, he started running. Even the minister of French finance Bruno Le Maire had to warn that the eurozone's second-largest economy will run the risk of a financial crisis if the far right were to win the parliamentary elections in the coming weeks. Marine Le Pen's eurosceptic National Rally (RN) is leading in opinion polls following President Emmanuel Macron's surprise decision on Sunday to call early elections. Le Pen's party calls for lowering the retirement age, reducing energy prices, increasing public spending and a protectionist "France first" economic policy.
The ECB is not worried. But she's ready
La European Central Bank follows carefully, but without excessive fear, the widening of spreads on the government bond market. “What we're seeing, I think, in the markets is a repricing,” the chief economist said this morning Philip Lane during an event organized by Reuters in London. “These are not disorderly market dynamics,” she added.
Still on this topic, the Irish member of the ECB board said that it is "super important” for the eurozone monetary union to have an emergency instrument like the Transmission Protection Instruments, the intervention program in case of excess fragmentation. The ECB's Transmission Protection Instrument (TPI) was designed in 2022 to stem a sharp decline in Italian government bond prices. It allows the ECB to purchase unlimited quantities of bonds if a country finds itself under market pressure despite sound economic policy. .
Five ECB central bankers told Reuters they had not discussed triggering an emergency bond-buying scheme to support French debt, nor were they currently planning to do so. However the sources expressed different levels of concern due to the extent of the collapse of French government bonds and generally agreed that it is up to French politicians to convince investors that they want to pursue a sensible economic policy. Two sources even suggested that the ECB should not intervene before of the formation of a new French government and the announcement of tax plans. However, some governors said they were unnerved by the prospect of financial turmoil in France, which until recently was considered the euro zone's second pillar of stability after Germany but now has its own fiscal problems.
Just mentioning the TPI makes you think of the next threshold of the Oat/bund spread: 100 bps
In the event of uncertainty, as we know, bond market investors prefer to exit the markets they consider to be at greater risk and instead focus on German bonds, considered the safest in the Old Continent. On Friday the Bund yield fell to 2,35% from 2,46% the day before, while this morning it was in a slight rebound phase at 2,37%. As a result, the interest differentials between the bund and the government bonds of other countries widened: the sprad Btp/bund spread rose to 156 basis points on Friday, the highest since April, and the Oat/bund up to 80 basis points, the highest since 2017. And even if they fell slightly this morning (to 155,6 bps and 74,6 bps respectively) investors are not calm. According to some observers, the aid could be triggered if the spread of the yields of French government bonds (Oat) on Bunds widens at 100 basis points. Which isn't that far off.
The postponement of the new Basel 3 rules would help banks
French banks were also hit hard and lost between 12% and 16% in value this week, the most since the banking crisis of March 2023. They continue their decline this morning. Considering the three largest: BNP Paribas it is at 58.41 euros down by 2,65%, Credit Agricole it is at 13.04 euros down by 2,98% and General Society it is at 22.15 euros down by 3,57%.
Speaking of this, there is another dossier that could represent a further help in case of alert: as much as possible partial postponement in Europe of the rules of new Basel 3. And above all the Banque de France, diplomatically hyperactive together with the Paris Government to protect the major transalpine banks, is behind this project. In recent days, rumors from Bloomberg have relaunched the hypothesis that the EU Commission is considering postponing for a year the entry into force of the new regulation, which raises the capital requirements of banks, making them postpone the departure from 2025 to 2026.
