Paris [France], October 27: France's deteriorating public finances will take centre stage when the European Central Bank meets this week, but policymakers are not expected to throw a lifeline to the eurozone's second-biggest economy just yet. The ECB is set to keep interest rates on hold, having already hiked them twice this year, walking a fine line between tamping down inflation fuelled by the Iran war energy shock and supporting the eurozone economy.
But the focus of Thursday's meeting is likely to shift quickly to France and "how the ECB will respond to the ongoing fiscal and political crisis," said Andrew Kenningham, chief Europe economist at Capital Economics. French bond yields, which reflect the cost of government borrowing, surged to their highest level since 2002 last week amid a standoff over next year's budget, which aims to reduce the country's vast debts.Concerns have also been fuelled after protests, driven in part by demands for more spending on public services, degenerated into the worst street violence in years.
There has been speculation that the ECB could, for the first time, use a crisis-fighting tool aimed at combating sharp movements in markets to push down French bond yields. However, the criteria to activate the so-called Transmission Protection Instrument (TPI) are strict, and most observers believe France's problems do not meet the threshold. The ECB stipulates that the tool can only be used to counter "unwarranted" moves in markets, where there is a risk of financial stress spreading-but not in cases where problems stem from poor fiscal policy.
So far ECB President Christine Lagarde, who also once served as France's finance minister, has sounded cool about the idea. Asked about France's rising yields earlier this month, she responded: "The primary and first solution lies at home in France. And it has to do with fiscal policies." France's central bank chief, who sits on the ECB's governing council, also downplayed the prospect of an intervention, saying that "conditions are not met" for the central bank to step in.Kenningham of Capital Economics predicted there would be "no lifeline for France" at Thursday's meeting, saying spreads between French and German bonds, the eurozone benchmark, would need to widen far more to justify any action.
Source: Qatar Tribune
