ECB’s Lagarde calls French debt-cancellation plan ‘financially dangerous’

European Central Bank President Christine Lagarde on Thursday dismissed French far-left leader Jean-Luc Mélenchon's proposal to cancel 18% of France's national debt, calling the idea "financially dangerous" and legally impossible under EU treaties.reuters+1

Lagarde's rebuke came during a press conference in which the ECB raised its key deposit rate by a quarter point to 2.5%, its second hike this year as persistently elevated energy prices keep eurozone inflation above the bank's 2% target. The rate decision, widely anticipated by markets, took a back seat to the pointed exchange over France's fiscal trajectory.reuters+1

A 'Large Waste of Time'

Mélenchon, a far-left presidential contender, has argued that the roughly 18% share of French sovereign debt held by the Bank of France could simply be written off, freeing up resources for social spending as the country's debt burden exceeds 116% of GDP. Lagarde, herself a former French economy and finance minister, offered a blunt analogy. If a borrower refused to repay and then sought new financing, she said, "I'm not going to finance you," adding that she would instead "significantly increase the interest rate" charged.devdiscourse+2

"Really not a good idea and a large waste of time, however popular that could be in any member state in the euro area," she said.reuters

Legal and Market Barriers

Lagarde also invoked Article 123 of the Treaty on the Functioning of the European Union, which bars the ECB and national central banks from directly financing governments. She called the provision "a pillar of stability" and warned that any attempt to circumvent it "would be a pure violation of the treaty".devdiscourse+1

The remarks land amid deepening anxiety over France's public finances. France's gross debt reached €3.54 trillion at the end of the first quarter of 2026, and the IMF projected in July that the debt-to-GDP ratio would exceed 120% by 2027. French 10-year bond yields recently hit their highest level since 2008, according to CNBC, as investors price in both fiscal and political risk.cnbc+1

Broader Euro Area Implications

Lagarde's warning carried weight beyond France's borders. Analysts noted that tolerating debt cancellation by one member state could undermine fiscal discipline across the eurozone and elevate borrowing costs for other indebted governments. With the ECB now tightening policy for the second time since June to combat inflation driven by energy prices, the prospect of a major member state seeking to sidestep its obligations added an unwelcome dimension to an already fraught policy environment.ground+1