French markets will be “angry” if the country's new government does not adhere to the European Central Bank's new budget rules, the institution's vice-president Luis de Guindos said on Tuesday.
De Guindos told CNBC's Annette Weisbach that developments in the French bond market last month were not cause for concern that would necessitate ECB intervention.
“What we have seen so far is that the evolution of [French] “The markets have been quite orderly,” he said in an interview at the ECB Forum on Central Banking in Sintra, Portugal.
“We have seen a small increase in spreads, but in that respect the situation is under control.”
The premium on the national debt borrowing costs compared to Germany recently hit its highest level since 2012. France's benchmark 10-year government bond yield has risen above 3.3%, about the highest level in 12 months, since snap elections were called by President Emmanuel Macron in mid-June.
A first round of voting over the weekend was won by the far-right National Rally party, but analysts said the split suggested a hung parliament could be the outcome in the second round on Sunday. It was seen as a favorable fiscal outcome by many investors, who are concerned about tax and spending proposals from both the far right and the far left.
De Guindos' message was reminiscent of that of ECB chief economist Philip Lane two weeks ago, when he said June The French bond sell-off was not 'disorderly'.
“I think this is not about monetary policy, this is about fiscal policy,” De Guindos told CNBC on Tuesday.
“The reason why the markets would be upset… for any government, not just France, is that fiscal policy is not adapting to the [ECB’s] “A new fiscal framework,” he continued.
“I think this is mainly about fully respecting the budgetary framework that was agreed at the beginning of this year.”
The framework released in March requires EU member states with a government debt of more than 60% of GDP or a deficit of more than 3% of GDP to submit a four-year budget plan to the European Commission, the EU's executive arm.
Even under the current pro-business, centrist government led by Prime Minister Gabriel Attal, a Macron ally, the Commission in June given a reprimand to France and six other countries for their high budget deficits. France's debt-to-GDP ratio was 110% last year.
“We will fully respect the outcome of any electoral process,” De Guindos said.
“Let's see, but … so far the evolution of markets has been quite normal. We haven't seen, let's say, turbulence or chilblains in markets.”
“Even if you look at yesterday's and yesterday's markets, the situation today is still a bit calmer than before.”
Anna Titareva, European economist at UBS, told CNBC's “Squawk Box Europe” on Tuesday that the outcome of the first round of the French election was received “somewhat positively” by the market.
“It seems that the risks of the far-left coalition of parties are now being priced in somewhat. Also with regard to the rhetoric of the far-right party, [it] appears to be somewhat more moderate regarding potential conflicts with the European Commission over the fiscal outlook.”
“When we think about the ECB [bond market] “They have several tools at their disposal for the intervention,” she continued, including the Transmission protection instrument And direct financial transactions.
“But they've stressed that they would only respond in the event of a disorderly market reaction. That's not what we're seeing at the moment. So at this point it seems like there's little reason for them to get involved.”
