Growing concerns about the sustainability of France's public debt are weighing on the euro, which until now had remained largely unaffected by turmoil in the bond market. The ECB may be forced to intervene to contain pressure on yields.
The common currency has begun to reflect investors' worries about the sustainability of French public debt, according to an analysis by Thu Lan Nguyen from Commerzbank, reported by fxstreet.es. The euro had largely stayed clear of the bond market turmoil in recent months, but that resilience has now broken.
The underlying issue, the analyst points out, is the central role played by the European Central Bank (ECB) in this mechanism. In the worst-case scenario, the institution would face a dilemma between its mandate to preserve price stability and its responsibility to safeguard financial stability.
“The fact that the common currency is now under pressure suggests, on the one hand, that markets perceive an increasing likelihood that the ECB will have to intervene after all”
Nguyen notes that markets also doubt whether the tools specifically designed for that scenario will be sufficient to contain the problem. The growing concern is that the ECB may ultimately be forced to adopt a more accommodative and persistent monetary policy stance to alleviate pressure on long-term bond yields.
The safe-haven status of German Bunds currently limits the euro's potential for depreciation. As long as investors have access to a safe asset denominated in euros, the current issues of the French government will remain more of a problem for OAT than for the common currency itself.
The analyst warns that the first signs of contagion spreading to Germany would constitute a clear warning signal for the euro. That would be the indicator for investors to watch in the upcoming sessions.
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