Sumitomo Mitsui DS Asset Management, one of Japan’s largest asset managers, said at the weekend it had sold all its French debt. In case of accelerated sales — or even worse, forced sales — the risk of contagion to other eurozone member countries rises further.
Who ya gonna call? Spread-busters!
The widening so-called spreads between national sovereign bond yields have raised questions about whether and how the European Central Bank might stop the rot. The ECB’s Transmission Protection Instrument (TPI) allows it to buy government bonds in the secondary market to counter “unwarranted, disorderly” market dynamics — but only under certain conditions. Before the ECB can use it, the Bank has to determine that a country is pursuing sound and sustainable fiscal and economic policies. For France, that would require big adjustment measures that will be nigh-impossible to pull off ahead of the 2027 elections.
“Help would likely require real commitment to stability, through fiscal discipline, reforms or both. Getting that support won’t be easy politically,” said Allianz Global Investors. Chief Economist Christian Schulz.
Stop (in the name of love for the euro)?
The ECB could also, in theory, intervene by using its balance sheet. For the last couple of years, it has allowed the bonds that it bought during years of “quantitative easing” to “run off” its balance sheet at the end of their lifetimes. That has forced governments to refinance the maturing debt in the markets instead. That increases the net supply of bonds to the market and adds to the upward pressure on yields.
Carsten Brzeski, ING’s global head of macro research, argued that the ECB could “pause quantitative tightening temporarily and reinvest maturing bonds in its portfolio ‘flexibly,’ sending a positive signal to bond markets.”
That possibility was also floated on Monday in an op-ed by Lorenzo Bini Smaghi, an Italian former member of the ECB’s board. It’s also at the heart of an appeal by Jean-Luc Mélenchon, the far-left’s presidential candidate in France, for the ECB to put a chunk of government debt “in the freezer.”