As French treasury yields soar, the ECB is under increasing pressure to act, and the bank faces the risk of getting caught up in the French bond market. The premium required for investors to hold French treasury bonds over the same period has risen to the highest level since the European debt crisis. The market is increasingly speculating about the extent to which the turmoil will worsen before the ECB can use a bailout tool it has not used until now. This is the kind of situation the ECB wants to avoid. When Italian treasury bonds were drastically sold off in 2022, the ECB decided to establish a “transmission protection tool”. This instrument itself exists to prevent financial market turmoil. What is even more embarrassing for officials is that they designed this tool to deal with unreasonable and disorderly market fluctuations that distort the transmission of monetary policy. But given that France's failure to meet its deficit target and the budget impasse put the focus of market attention, it may be difficult for the current situation to meet these conditions. Piet Christiansen, chief strategist at Danske Bank, said: “Given fiscal positions and political uncertainty, there is a reason for interest spreads to widen. But this is also what makes the market's judgment on the ECB complicated. If this interferes with the transmission of monetary policy, it is a problem that the ECB has to deal with. If not, then let the market price these drivers without intervention.”
Zhitongcaijing · 1d ago
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As French treasury yields soar, the ECB is under increasing pressure to act, and the bank faces the risk of getting caught up in the French bond market. The premium required for investors to hold French treasury bonds over the same period has risen to the highest level since the European debt crisis. The market is increasingly speculating about the extent to which the turmoil will worsen before the ECB can use a bailout tool it has not used until now. This is the kind of situation the ECB wants to avoid. When Italian treasury bonds were drastically sold off in 2022, the ECB decided to establish a “transmission protection tool”. This instrument itself exists to prevent financial market turmoil. What is even more embarrassing for officials is that they designed this tool to deal with unreasonable and disorderly market fluctuations that distort the transmission of monetary policy. But given that France's failure to meet its deficit target and the budget impasse put the focus of market attention, it may be difficult for the current situation to meet these conditions. Piet Christiansen, chief strategist at Danske Bank, said: “Given fiscal positions and political uncertainty, there is a reason for interest spreads to widen. But this is also what makes the market's judgment on the ECB complicated. If this interferes with the transmission of monetary policy, it is a problem that the ECB has to deal with. If not, then let the market price these drivers without intervention.”
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