Can France rely on the ECB if its bonds blow up?

The political turmoil in France has drawn speculation that Europe might be about to return to the bad old days of sovereign debt crises. Even the European Central Bank itself has admitted the possibility.
The ECB has added to its armory since the markets last challenged its will to keep the eurozone together. But will it activate its newest crisis tool — the untested “Transmission Protection Instrument,” or TPI — to keep French borrowing costs down? Short answer: The bar for ECB interventions seems high and the conditions for them are certainly not yet in place.
Still, with political events moving fast and the markets even faster, POLITICO thinks it’s time for a quick reminder of what the TPI could do, why it exists, and when it might be used.
The ECB created the TPI in 2022, to pre-empt the risk that financial markets would speculate on the eurozone’s breaking up under the strain of the first major monetary policy tightening cycle since 2008.
The tool allows the ECB — under certain conditions — to buy the governments bonds of individual member states to keep a lid on borrowing costs, thereby ensuring that the eurozone doesn’t end up with loan and deposit rates that vary sharply across the region. This goal is referred to as the smooth, or even, transmission of monetary policy.
At the time of the TPI’s creation, the risk premium, or ‘spread’ attached to benchmark 10-year Italian bonds — that is, the extra return demanded by investors to hold Italian debt rather than a safer credit such as Germany — had risen above 2 percentage points. Even so, the ECB refrained from intervening.
Not yet. Today, the spread of France’s benchmark 10-year OAT over the comparable Bund is 85-87 points, well below the level previously experienced by Italy, let alone by countries such as Greece and Portugal, when they had to be bailed out 14 years ago. That suggests that official interest rates are still ‘transmitting’ their signal more evenly than they did back then.  
But the TPI isn’t just about absolute, or even relative levels of bond yields. It’s about how quickly they move, and whether the ECB considers such moves justified. The central bank has said it will use the TPI “to counter unwarranted, disorderly market dynamics.”   
So far, market dynamics have been neither unwarranted nor disorderly: Spreads widened sharply in June as President Emmanuel Macron lost control of France’s parliament to hard-left and hard-right parties opposed to his budget policies, among other things. They have fluctuated in a narrow range since then as the market has waited to see whether Prime Minister Michel Barnier could somehow push through a budget for next year that would cut the deficit by an amount acceptable to Brussels. But as the moment of truth approaches, anxiety has increased and pushed the Bund-OAT spread as wide as 90 basis points, the most since 2012.
You can find the ECB’s self-defined conditions here.
Welcome to our world. It means, to all practical purposes, that the ECB will only help those who play by the EU’s rules. They should not be facing a disciplinary procedure from the Commission for running excess budget deficits, nor be running big external current account deficits. Most importantly, they mustn’t be on a road that would normally end in the government’s collapsing under the weight of its own debt.
Not officially. As it’s a monetary policy instrument, the ECB has exclusive legal competence in using the TPI. In reality, however, you would expect communication between Frankfurt and Brussels — and between Frankfurt and national capitals — to intensify if things get any more tense.
Not too well, tbh. It is subject to an EU excessive deficit procedure, and markets are losing confidence in its ability to pursue “sound and sustainable macroeconomic policies.” Its budget deficit is set to widen to over 6 percent of GDP this year, and Barnier’s efforts to put it on a more stable footing are being thwarted by an opposition majority that has not presented a credible alternative plan.
The ECB was careful not to tie its hands when designing the TPI, saying its criteria would only serve as “an input” to the Governing Council’s decision-making process.
Italian central bank chief Fabio Panetta said ahead of the French elections this summer that the ECB should be “prepared to deal with the consequences” of shocks caused by “an increase in political uncertainty within countries.”
Yet others are clearly less ready to use any wiggle-room. “What happens with individual government bonds is typically a reflection of what may be happening politically in the country at the time,” Bundesbank chief Joachim Nagel said Friday. Wider spreads that arise in such a context “wouldn’t be an issue that would justify us concluding that the transmission of the monetary policy impulse is disrupted.”
Analysts don’t expect the ECB to pull the trigger immediately.   “If you look at the criteria that they listed, France doesn’t meet many of these,”  Bas van Geffen, senior macro strategist at Rabobank, told POLITICO. Similarly, Barclays said in a note to clients that it does not expect the ECB to launch the TPI even if the government collapses.
Capital Economics’ chief Europe economist Andrew Kenningham said he “would not completely rule out use of the TPI for France, but only in an extreme sell-off environment and only if France’s government appeared more stable and signed up to corrective fiscal policy.”
However, Kenningham  stressed that “at this stage” he thinks the ECB is “much more likely to use the TPI to support other countries affected by contagion from France than to help France itself.”
In other words, the ECB might intervene should an escalation of tensions in France push up the borrowing costs of innocent bystanders who are playing nice with the Commission. As Kenningham  points out, this would meet the ECB criteria of purchases being made for “jurisdictions experiencing a deterioration in financing conditions not warranted by country-specific fundamentals.”
Nope. By mid-afternoon in Europe on Monday, French bonds, and French assets in general, were moving mostly in isolation from their European peers: Its benchmark 10-year bond yield was up 0.03 percentage point on the day, while those of Italy, Portugal and Greece were all following German yields downward (yields rise as prices fall). That was after Barnier appeared to give up on passing a budget through parliament. Instead, for the social security system, he has invoked a constitutional amendment (Article 49.3), which allows him to pass a budget without a vote in parliament, but which exposes him to a vote of no-confidence later this week.
(CORRECTION: An earlier version of this story incorrectly attributed a quotation.)