MNI INTERVIEW: ECB Should Not Ease French Bond Woes - Papadia

The ECB should do nothing to ease the rise in French bond yields even if the market situation worsens further, the ECB’s former director general of market operations Francesco Papadia told MNI. 

"On France, this looks to me as an obvious case in which the ECB should do nothing. And should do nothing even if the situation, unlike now, would become acute," Papadia, who left the ECB in 2012, said in written replies to questions.

Since the climb in yields is not "an unwarranted speculative attack", but rather a question of "political will", Papadia said there was no case for the ECB to trigger its Transmission Protection Instrument.   

"France is economically capable of dealing with its deficit and debt problem; the issue is one of political will, not of an unwarranted speculative attack and I don't see how the ECB could remedy this,” he said. (See MNI: French Austerity Plan To Largely Survive Crisis-Officials)

UNJUSTIFIED

Asked whether there might be a case for the ECB to take less drastic action to ease France's bond market woes, such as halting the run-off of French bonds from its balance sheet, Papadia said that even that would be "unjustified". 

"The bar for excluding OATs from run off, you mention, is lower than for TPI, but also this would be, in my view, unjustified."

It would take an unlikely configuration of events to prompt the ECB to deploy TPI, according to Papadia. A severe blow-out of the OAT-Bund yield would have to be combined with French parliamentary approval of a budget reducing the deficit and with recognition of a significant fiscal improvement by the European Commission, he said.

For now, while ECB President Christine Lagarde is not likely to rule out ECB intervention, she is likely to stress the conditions under which TPI is permissible, Papadia said.

The ECB has said that the Governing Council would consider whether any member state in need of assistance is pursuing sound and sustainable fiscal and macroeconomic policies before activating the TPI.

Lagarde told a press conference on Thursday that the Governing Council did not discuss the TPI, while the ECB’s post-meeting statement again recalled that the instrument "is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries.”

Papadia is now a senior fellow at the Brussels thinktank Bruegel.