Can the ECB Solve France’s Debt Crisis?

That's what's taking place in France right now as the euro drops to a seventeen month low. The growing debt crisis in France is hammering the currency. Dani Burger of TD Securities writing, we see scope for near term euro underperformance, but not a derailment of the broader trajectory beyond October. Jayati joins us now for more. Jayati, good morning. Good morning. How much of a problem do we have in the French debt market this morning? It's come off the highs, so the spreads have come off. And, you know, we... This is materially different from the last time we saw OET bond spreads spike to this level, which was around the eurozone debt crisis back in 2011 to 2013. At that time, it was a much broader... What... Bright... You know, broad spread issue, which also... It was also the Italy debt, the Greece debt, which were bigger issues. It became a systemic problem. This time around, it's mainly concentrated in France. We do know they're trying to dial back the fiscal budget. You know, they have the 5% target. There is some hope that they will be able to achieve that. You know, we do have the discussions upcoming in mid October. We have the Moody's review on October 23. They're all key catalysts in the next two weeks, but there's definitely a lot of push within the different fragments of the government as well to make sure that there's no crisis and meltdown in the markets permanently. Whenever you get to these kind of levels, inevitably, there's a discussion about whether the ECB is gonna intervene. Interview. And there is an alphabet soup worth of tools for the ECB to lean on if they won. TPI is the latest. Are they eligible for TPI given where the deficit is right now and how hard the EU has come down on the French more recently over that deficit north of 5% and not close enough to three? So you are right. So the ECB does have a couple of options left. Before TPI, they do also have PPP. So right now, they're doing quantitative tightening. The first thing would be to stop that and start doing reinvestments. So that would be the first step before they get to TPI, and you are right. With TPI, there's questions about, you know, eligibility of France for that. If France is able to rein in some of the spending, you know, and there there is talk of clearly freezing the, you know, wage increases for the public sector, there's talk of, you know, cutting down the health care and, you know, drugs bill. If they are able to get all of that agreement within the parliament, they might be able to qualify for that. So that's the second step, however, but ECB still has a PPP, which is right now in quantitative tightening mechanism. They can immediately stop that and do reinvestments as a first step. If the ECB does come to France's rescue, how much does it weaken the euro going forward? So if the ECB does come to the rescue at the very immediate onset because it will hopefully bring down the spreads between OAT and bonds, Marginally, should help the euro. The interesting thing is that the euro has been responding to this crisis only for the last two trading days of the week. Before that, the euro was actually outperforming its g 10 peers even with the dollar rally we were seeing. So it was very fascinating given where the market was trading the spreads back in 2011, 2013, the euro should already have been below one ten. The... It's very interesting why it's already not there. Even right now, we have touched year to date highs in the dollar, but not broken it. You know, markets keep coming off. Look at where US yields are. We were just discussing that. But the dollar still struggles to meaningfully rally here, and I think markets are not willing to become permanently bearish hero like they were pre 2025. There's some speculation that the ECB cannot hike rates or will not hike rates as much as they otherwise would as a result of what's going on with peripheral yields. How do you view that as part of this calculus? Do you think that that seems like a likely path of travel? So the ECB's debate right now is growth versus inflation. Right now, outside of all of this meltdown in in the spreads, growth has been holding up. In fact, growth has been surprising to the upside. And ever since we had that MOU, which was temporarily signed between US and Iran, everything in the EU has rebounded massively and very impressively. If the October catalysts and the deadlines in the next few weeks are passed with the same scenario, I think the ECB can still tighten in hike interest rates in December because it will be concentrated in France. It's not gonna become a broader systemic issue. Financial conditions are not gonna tighten aggressively, so the growth outlook should still remain resilient. But if we do get to the adverse scenario, if spreads spike up beyond one sixty, then, you know, that's when you get to that scenario. They will be forced to take that into consideration.