French debt: the Bank of France deems its cancellation "illegal, dangerous and unnecessary"

According to its governor, Emmanuel Moulin, erasing part of the French public debt held by the Bank of France would not restore the country's budgetary flexibility. Appearing on RTL radio on Friday, September 11, the central bank official strongly criticized this proposal, which was put forward by Jean-Luc Mélenchon during the presidential campaign.

"It is illegal because it is contrary to the treaties," "dangerous because it creates inflation" and "useless" because it "does not reduce the budget deficit," said Emmanuel Moulin.

Central banks consider this measure contrary to European treaties.

The governor believes that a unilateral cancellation of the debt held by the Bank of France would undermine the functioning of the eurozone. According to him, the proposal has "received no response in Europe" and could lead France to leave the single currency.

To illustrate his reasoning, Emmanuel Moulin compares the euro zone to a condominium: "The euro zone is a condominium. So if we don't pay the condominium fees, the other co-owners will tell us, 'Guys, you're going to leave'."

The president of the European Central Bank (ECB), Christine Lagarde, also rejected this hypothesis. When questioned on Thursday, September 10, she stated that debt cancellation would contravene Article 123 of the Treaty on the Functioning of the European Union and constitute a "pure violation of the treaty."

The Bank of France fears a rise in borrowing costs.

The second argument put forward by Emmanuel Moulin concerns the financial consequences of the operation. A cancellation would be considered a default, likely to damage investor confidence and trigger a further rise in interest rates.

“We’re going to have much more difficulty borrowing on the markets (...) and that’s going to be detrimental to the French,” he warns. An increase in the cost of government financing could also have a broader impact on the credit conditions granted to households, businesses, and local authorities.

This issue is particularly relevant to the real estate and construction sectors, whose activity is heavily dependent on access to credit and public and private investment capacity.

French interest rates at their highest since 2008

The governor's statements come amid heightened tension in the bond market. On Thursday evening, the yield on French 10-year bonds approached 4,44%, its highest level since 2008. It remained around 4,43% on Friday.

At the same time, the German ten-year rate reached around 3,50%, a high since 2011. The gap between French and German yields, commonly called "spread", thus amounted to almost 0,94 percentage points, a level not seen since 2012.

This difference represents the additional premium demanded by investors to finance French debt compared to German debt, which is considered the benchmark for the eurozone.

A cancellation deemed to have no effect on the deficit

Emmanuel Moulin believes that the operation would not resolve the imbalance between public revenue and expenditure. It would primarily shift the deficit from the State's balance sheet to that of the Bank of France.

"You reduce the national debt by 500 billion but you create a 500 billion hole in the Bank of France. Frankly, have we made much progress?" he asked.

According to him, a cancellation "does not free up room for maneuver" and "does not reduce the budget deficit." France would therefore continue to have to borrow to finance its new spending as long as its annual accounts remain in deficit.

France Unbowed disputes this analysis

Jean-Luc Mélenchon reacted on social media, accusing the governor of spreading false information. Manuel Bompard, coordinator of La France Insoumise, also defended the movement's proposal.

According to him, a "freeze on the debt securities of states held by the ECB" would not necessarily lead to a rise in interest rates. On the contrary, he believes that reducing debt would improve the financial situation of states.

Manuel Bompard also argues that the ECB's bond-buying operations have not led to inflation. He believes that underinvestment in climate change adaptation poses a greater inflationary risk, particularly when weather events reduce agricultural production and drive up food prices.

The debate thus pits two analyses of the legal and economic consequences of debt cancellation against each other. It comes at a time when rising bond yields are already increasing the cost of public financing and fueling concerns about the future investment capacity of the state and local authorities.