The Lombard Review
Markets & Finance

Is France the eurozone's next crisis?

TPI eligibility and spread ceiling

The Frankfurt skyline at night
The Frankfurt skyline at nightPhoto: Paul Colin Hennig firstdorsal.eu / Wikimedia Commons, CC BY-SA 4.0
1 min read Data: Spread ~80bp, widest since 2012

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.

The Bureau of Engraving and Printing, which prints U.S. currency
The Bureau of Engraving and Printing, which prints U.S. currencyPhoto: Harrison Keely / Wikimedia Commons, CC BY 4.0

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.

Canary Wharf seen from Wapping, East London
Canary Wharf seen from Wapping, East LondonPhoto: Diliff / Wikimedia Commons, CC BY-SA 3.0

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.