Berenberg on ECB and France
Despite mounting problems, France is not (yet) close to a full-blown crisis. In case of a dramatically worsening crisis, the ECB could use its tools such as liquidity injections into short-term funding markets to prevent them from seizing up and/or deploy its “Transmission Protection Instrument (TPI)" to shield other countries such as Italy from contagion risks. However, the ECB has no mandate and no appetite to fund French fiscal follies. In our view, the ECB would only support France if Paris returns to more sustainable policies. Recent market moves seem to mostly reflect France's worsening fundamentals. Of course, if the French yield spread were to blow out in a disorderly fashion and by far more than the fundamentals may warrant, the ECB may try to constrain that with a cautiously worded verbal intervention. In our view, we are not close to such a situation.
Despite mounting problems, France is not (yet) close to a full-blown crisis. In case of a dramatically worsening crisis, the ECB could use its tools such as liquidity injections into short-term funding markets to prevent them from seizing up and/or deploy its “Transmission Protection Instrument (TPI)" to shield other countries such as Italy from contagion risks. However, the ECB has no mandate and no appetite to fund French fiscal follies. In our view, the ECB would only support France if Paris returns to more sustainable policies.
Recent market moves seem to mostly reflect France's worsening fundamentals. Of course, if the French yield spread were to blow out in a disorderly fashion and by far more than the fundamentals may warrant, the ECB may try to constrain that with a cautiously worded verbal intervention. In our view, we are not close to such a situation.