Draghi says bar is high for ECB to rescue France

Former European Central Bank President Mario Draghi said on Thursday, October 15, that the ECB is unlikely to step into markets any time soon to support France. He said high inflation limits how far the bank can go, and that the euro area is still a long way from repeating the sovereign debt crisis he helped contain more than a decade ago.news.bloombergtax.com

His comments come as investors weigh whether Frankfurt might use its crisis tools to rein in French borrowing costs, which recently climbed to their highest levels in more than 20 years.

A High Bar

"The bar is high," Draghi told Bloomberg Editor-in-Chief John Micklethwait at the Bloomberg New Economy Forum in New Delhi. He compared today with the debt-crisis years: "We had more kind of a deflation, or at least inflation rates just above zero," but "now, inflation is high," he said. Draghi said the ECB's first priority, under its mandate, is price stability.bankingnews.gr+2

According to Placera's summary of the Bloomberg interview, Draghi said the ECB's market-intervention tool can in principle be used for a country under the EU's excessive deficit procedure, but the threshold is higher in that case. He also said a possible ECB intervention has become part of France's political debate, and that the central bank would likely want to stay out of one country's domestic political fights.placera.se

His view matches that of current ECB President Christine Lagarde. On October 14 she said "the primary and first solution lies at home in France, and it has to do with fiscal policies".cnn.com

Pressure on French Debt

France's 10-year yield hit 4.9% on October 2, its highest since 2002. Its spread over German Bunds was the widest since late 2011. Public debt is close to 120% of GDP.global.morningstar.com+1

The government's 2027 budget includes €43 billion in measures and aims to cut the deficit to about 5% of GDP, down from 5.4% in 2026. France's fiscal watchdog called the plan "optimistic". Finance Minister Roland Lescure has said the market turmoil has not reached the point where ECB tools should be considered.observer.co.uk+1

Not a Repeat of 2011

Several analysts share Draghi's view that this is not a crisis. TD Economics says France's five-year credit default swap spreads, a gauge of default risk, are only about a third of their 2011 peak. Lombard Odier says markets are "pricing uncertainty rather than the conditions for a new sovereign debt crisis".lombardodier.com+1

Inflation is also pushing the ECB the other way. Persistent price pressures and the US-Iran conflict have raised expectations of another rate hike in December, after two increases earlier this year. Draghi said that kind of environment leaves little room to rescue Paris.tradingeconomics.com