Germany May Object If ECB Moves to Lower French Bond Yields

(Bloomberg) -- German Finance Minister Christian Lindner said it could be illegal for the European Central Bank to intervene if the French legislative election triggers a dangerous selloff in the country’s government bonds.

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“A strong intervention by the ECB would raise some economic and constitutional questions,” Lindner said Thursday when asked about such a scenario at an Ifo institute event in Munich.

He referred to tools available to the central bank under its Transmission Protection Instrument (TPI) “that have so far only existed as a press release.” Their use “would also test the German finance minister to see whether all this is still in line with treaty law,” he added. “That’s why I don’t want that.”

President Emmanuel Macron’s surprise June 9 decision to call the election unsettled bond investors, who are demanding the widest-yield premium over German debt since the euro-area crisis more than a decade ago.

The spread edged higher again on Thursday, rising to as much as 82 basis points in a sign that investors remain concerned about potential political disruption. The first round of voting will be held on Sunday and the second and final round will be held a week later.

Investor fears were triggered by spending plans outlined by Marine Le Pen’s far-right National Rally party, which is leading in the polls, and by a leftist alliance called the New Popular Front, which is in second place.

The ECB crafted TPI in 2022 just before it started to raise interest rates, amid concerns that monetary tightening would cause market turmoil.

Much like the bond-buying backstop announced a decade earlier at the height of Europe’s debt crisis, policymakers have been vague about the program’s design in order to avoid potential legal problems.

While asset purchases have become part of the ECB’s toolkit, they remain controversial and regularly land the institution in court.

So far, judges have sided with the ECB in arguing purchases are legal, but they’ve also imposed strict limits and conditions that policymakers have pushed over the years.

--With assistance from Jana Randow.

(Update with bond market movements in fourth and fifth paragraph)

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