All the scenarios for the day after the parliamentary elections in France are on the meeting table at the ECB’s iconic tower in Frankfurt.

A common theme of the analyzes is that the result of the French ballot box will be a decisive parameter for how the French and wider European bond market will behave from Monday, although there is optimism that the worst scenarios will not be verified.

That is, the next day to find France in a state of non-government, a possibility that would send strong signals of uncertainty to the markets about the course of the French economy and the ability to take decisions to reduce the budget deficit, which this year is expected to fluctuate between 5-5, % of GDP and debt that has exceeded 100% of GDP.

That is why Europe is waiting with bated breath for the result of the ballot box, since a strong signal of uncertainty from them could unsettle the markets, triggering large waves of turmoil in European bonds and stock markets.

Line of defense

In any case, the ECB is ready to react, say executives with knowledge of the discussions and decisions that have been made at the Central Bank’s staff. Since the pandemic, the ECB has created a special defense tool, the Transmission Protection Instrument (TPI), which enables direct intervention with bond markets of countries under great pressure. This tool is ready to be used by the ECB, if necessary, from Monday in the event of “attacks” on French bonds or a wider domino of turmoil in the European bond market. Frankfurt’s “line of defense”, as ECB officials assure, can be activated, if necessary, for all countries from the largest to the smallest, which usually come under the greatest pressure in such upheavals.

New interest rate cuts

The bond market situation in the wake of the French election is sure to be discussed at the ECB’s monetary policy meeting on July 18. The other major issue is interest rate policy.

At the moment there is no question of a further reduction, after the reduction in June. However, correlations in the ECB staff indicate that the interest rate de-escalation policy will continue, with a more likely possibility of deciding on a reduction in September and another in December, if market conditions and inflation allow. As far as inflation is concerned, which is also the determining factor in the policy of reductions, the estimates arriving in Frankfurt are encouraging.

They show that it is easing in Europe and the US allowing more flexibility in the movements of central banks. In any case, however, as ECB officials declare, great care is required in the next steps.