Sumitomo Mitsui DS Asset Management, one of Japan’s largest asset managers, announced this weekend that it had sold all of its French debt. In the event of accelerated sales – or even worse, forced sales – the risk of contagion to other euro zone member countries increases further.
Who are you going to call? Anti-spreaders!
Widening spreads between national sovereign bond yields have raised the question of whether and how the European Central Bank could put an end to this rot. The ECB’s Transmission Protection Instrument (TPI) allows it to buy government bonds on the secondary market to counter “unjustified and disorderly” market dynamics – but only under certain conditions. Before the ECB can use it, the Bank must determine whether the country is pursuing sound and sustainable fiscal and economic policies. For France, this would require significant adjustment measures which will be almost impossible to implement before the 2027 elections.
“Aid would likely require a real commitment to stability, through fiscal discipline, reforms or both. Obtaining this support will not be easy politically,” Allianz Global Investors said. Christian Schulz, chief economist.
Stop (in the name of love for the euro)?
The ECB could also, in theory, intervene using its balance sheet. In recent years, it has allowed bonds it purchased during the years of “quantitative easing” to “flow” from its balance sheet at the end of their lifespan. This forced governments to refinance maturing debt on the markets. This increases the net supply of bonds in the market and puts further upward pressure on yields.
Carsten Brzeski, global head of macro research at ING, argued that the ECB could “temporarily suspend quantitative tightening and reinvest maturing bonds in its portfolio in a “flexible” way, sending a positive signal to bond markets.
This possibility was also raised on Monday in an article by Lorenzo Bini Smaghi, former Italian member of the ECB board. It is also at the heart of the call by Jean-Luc Mélenchon, far-left candidate for the French presidential election, for the ECB to put part of the public debt “in the freezer”.
Gn bussni
