The Lombard Review

Is France the eurozone's next crisis?

16 Place de la Bourse, Paris.
16 Place de la Bourse, Paris. Photo: Neoclassicism Enthusiast/Wikimedia Commons · CC BY-SA 4.0
By The Lombard Review
1 min read

The spread between French ten-year sovereign debt and German Bunds has blown out to eighty basis points—its widest level since the sovereign debt crisis of 2012. Emmanuel Macron’s dissolution of parliament has turned French public debt into a speculative battleground. Bond investors are contemplating an unprecedented scenario: the eurozone’s second-largest economy drifting into fiscal delinquency.

A $100,000 gold certificate, the largest U.S. note ever printed.
A $100,000 gold certificate, the largest U.S. note ever printed. Photo: BrayLockBoy/Wikimedia Commons · Public domain

The TPI Constraint

Market participants who assume the European Central Bank will deploy its Transmission Protection Instrument (TPI) to compress French spreads are ignoring the legal framework. TPI intervention is strictly contingent upon a nation adhering to European Union fiscal rules. If a incoming populist or leftist government enacts budget-busting fiscal measures, Frankfurt will be legally prohibited from backstopping French sovereign paper.

A Yes Way gas station in Fort Pierre, South Dakota.
A Yes Way gas station in Fort Pierre, South Dakota. Photo: Tony Webster/Wikimedia Commons · CC BY 2.0

France is discovering that sovereign bond markets possess an unsparing memory; if Paris rejects fiscal discipline, the ECB will not serve as a frictionless lender of last resort.

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