France's bond selloff could become a test for whoever leads the European Central Bank next, Bloomberg's Mark Schroers and Craig Stirling argue. In their Oct. 25 account, they write that the presidency race looks increasingly likely to hinge on which candidate can take on pressure from bond investors. They name Klaas Knot and Pablo Hernandez de Cos as people who might soon face that challenge.
Reuters reported on Oct. 23 that French 10-year borrowing costs had reached 24-year highs above 5%. The premium investors demanded to hold French 10-year bonds over German ones stood at 170 basis points, up from 92 basis points when the ECB met the previous month.
Reuters cautioned against expecting the ECB to act soon through its Transmission Protection Instrument, which allows bond purchases for a member state facing “unwarranted, disorderly” tightening of financing conditions. Berenberg chief economist Holger Schmieding said that if a hypothetical French crisis seriously spread to countries with more sustainable fiscal policies, the ECB would probably use the tool to shield those countries, not France. His forecast was conditional, not an ECB decision.
Reuters reported that Knot and Hernandez de Cos, former central-bank governors of the Netherlands and Spain, are seen as frontrunners. Lagarde's term is scheduled to end next October, though Reuters said she could be appointed the next World Economic Forum chair as early as November. An early departure would allow time to choose a successor before France's spring presidential election.
