The headline below is the complete truth and exact representation of the situation that France are in. Kazaks said more tightening could be needed if inflaiton persists (which we know), but more importantly emphasised that the ECB can’t fix the French situation. As I laid out in the Substack chat, the problem in France is a fiscal problem (which comes from the budget and politics around that), and the recent riots are making the fiscal side worse EVERY week. These are two inputs that monetary polict CAN’T fix.
When Barnier was getting thrown out in 2024, the OAT/Bund spread was roughly 80bp, we’re now seeing it trade at about 175bp which means that even at the extreme in 2024, we didn’t reach even half of this spread. If the ECB were really the problem, Bunds wouldn’t be rallying as they have been across the last couple of weeks. French OATs are literally moving in the opposite direction to German Bunds…
This French credit event is being driven solely by the budget and politics and the ECB will not be able to fix it without bending its own rules or even worse, pushing the problem into the euro. The TPI was created for countries who are following the fiscal rules, but France is under a massive deficit procedure and parliment is crushing the budget). Until this budget issue is resolved (which once again, is NOT an ECB issue), we will probably hold an extreme in the OAT/Bund spread.
Now I don’t neccesarily think this spread is going to keep blowing out as it has, but for sure I don’t see us trading back to normal levels anytime soon. Even if the sprwad begins to mvoe back up (French OATs outperforming Bunds), we will still be at an extreme.