Eurogroup Urges Passage of 2027 Budget ECB Signals Caution on Market Intervention
Concerns are mounting that France's fiscal troubles could spill over into eurozone financial markets more broadly, but the 21 countries that use the euro have ruled out any direct rescue of the French government bond market.
The Eurogroup, which brings together finance ministers from the eurozone, held its monthly meeting in Luxembourg on the 8th to discuss the recent surge in French bond yields and the country's fiscal strains, Reuters reported.
Participants stressed the urgency of France passing its 2027 budget to stabilize markets. No eurozone institution, however, is prepared to step in now to lower France's borrowing costs, and ministers agreed that French politicians must resolve the uncertainty themselves, according to the report.
Kyriakos Pierrakakis, the Greek finance minister who chairs the Eurogroup, told a news conference after the meeting that the group trusts France's commitment on public finances. European Central Bank President Christine Lagarde also signaled caution on immediate intervention, saying the ECB has tools to respond to market turmoil but that activating them carries strict conditions.
The ECB has a Transmission Protection Instrument, or TPI, that allows it to buy a member state's bonds when a sharp rise in that country's yields threatens the transmission of monetary policy. Using the facility, however, requires meeting several conditions, including sound public finances.
The European Union in principle requires member states to keep budget deficits below 3% of gross domestic product and public debt below 60% of GDP. France's deficit reached 5.1% of GDP last year, with public debt at 115.6%.
The French government has proposed an austerity budget aimed at narrowing the deficit to about 5% of GDP next year from an expected 5.4% this year. But political turmoil over the budget has brought three changes of prime minister since 2024, and with a presidential election due in April next year, it remains unclear whether the target can be met.
Market anxiety is also building. The yield on France's 10-year government bond has jumped from around 3.2% in February to near 5% recently. Investors, seeing little prospect of a resolution to France's fiscal problems, are shifting money into relatively safe assets such as German bonds.
The gap between French and German 10-year yields has widened sharply. The spread between the two exceeded 150 basis points on the 2nd of this month, the widest since the eurozone debt crisis of 2010 to 2012. One basis point equals 0.01 percentage point.
Unusual signs are emerging in France's corporate bond market as well. According to Bloomberg, 38% of French corporate bonds are trading at higher prices than the country's own government debt, an 18-fold increase from the start of the year.
Mitch Reznick of asset manager Federated Hermes said French government bonds are increasingly being priced more like those of the eurozone periphery than of its core.
Some in the market worry that France's fiscal strains could go beyond one country's bond market and push up the risk premium across the eurozone. For now, eurozone policymakers maintain that the priority is for France to break its political deadlock and restore confidence in its fiscal plans.
Original reporting by Kim Jung-wook for Seoul Economic Daily.
AI-translated from Korean. Quotes from foreign sources are based on Korean-language reports and may not reflect exact original wording.
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