Key facts
- Far-left presidential candidate Jean-Luc Melenchon proposed the Bank of France cancel its holdings of French debt.
- The plan aims to reduce France's public debt ratio, currently over 116% of GDP.
- Prime Minister Sebastien Lecornu criticized the proposal as 'fraud' and warned of investor backlash.
- Former IMF chief economist Olivier Blanchard labeled the debate 'idiotic' and irresponsible.
- Investment banker Matthieu Pigasse supported the cancellation, claiming no economic or financial impact.
Far-left presidential candidate Jean-Luc Melenchon has reignited a debate by proposing that the Bank of France cancel its holdings of French debt, a move he claims would reduce the nation's public debt ratio and create fiscal space for increased public spending. Melenchon's proposal suggests taking the 18% of French debt held by the central bank and effectively eliminating it.
This unorthodox fiscal idea is gaining traction among some voters, with polls indicating Melenchon could reach the runoff in next year's presidential election. The concept of central banks cancelling government debt has surfaced before, notably during the COVID-19 pandemic, but has consistently been rejected by policymakers.
Prime Minister Sebastien Lecornu strongly condemned the proposal, calling it 'fraud in its purest form' and warning that such a move would damage market confidence and lead to exorbitant borrowing costs for France, which needs to raise a record 310 billion euros this year. He argued that reneging on debt obligations would deter lenders.
Former IMF chief economist Olivier Blanchard echoed these concerns, deeming the debate 'idiotic' and irresponsible. He explained that while the Bank of France's profits are returned to the state, cancelling debt would eliminate interest earnings without fundamentally altering the bookkeeping in a beneficial way for the state, while severely shaking private investor confidence.
However, not all have dismissed the idea. Investment banker Matthieu Pigasse, known for his work on debt restructuring, backed Melenchon's plan, asserting that cancelling bonds held by the Bank of France would have no significant economic or financial impact. The Bank of France itself declined to comment, but its former governor has previously stated that such an action would force France to abandon the euro and saddle taxpayers with substantial losses.