Key facts
- Jean-Luc Mélenchon, a French presidential candidate, has proposed writing off parts of France's sovereign debt.
- Mélenchon's allies are attempting to clarify his rhetoric, emphasizing a "freeze" of debt held by the central bank.
- The proposal involves removing debt from the market by placing it in the central bank's vaults to shield it from speculative attacks.
- Critics, including central bankers, argue the plan would be illegal and amount to direct financing of member states by the ECB.
- The Bank of France holds about 15% of French debt, a proportion expected to decline further.
- The ECB's discontinuation of debt-purchasing policies is reducing the amount of debt held by national central banks.
French presidential candidate Jean-Luc Mélenchon's controversial proposal to write off parts of France's sovereign debt has prompted his allies to attempt to clarify his rhetoric. Mélenchon has used strong language, including wanting to set France's debt "on fire," which has drawn criticism from political opponents and central bankers.
Economists affiliated with Mélenchon's France Unbowed party, such as Eric Berr of Institut La Boétie, are seeking to reframe the debate around reducing the influence of financial markets on sovereign debt. They emphasize a proposal to "freeze" debt held by the Bank of France at a zero interest rate, akin to placing securities in the central bank's vaults to shield them from speculative attacks and prevent them from being sold off by private investors, which could drive up interest rates.
This "freeze" concept is presented as distinct from outright cancellation, though Mélenchon himself has used both terms interchangeably. The proposal echoes ideas from his previous campaigns, aiming to convert debts into perpetual zero-interest loans with no repayment date. The French central bank currently holds approximately €488 billion of French debt, less than one-sixth of the total.
However, the plan faces significant opposition. European Central Bank President Christine Lagarde, along with the governors of Germany's Bundesbank and the Bank of France, have stated that such a measure would be illegal, violating EU treaties that prohibit the direct financing of member states by the ECB. Amending these treaties would require unanimous approval and considerable time.
Adding to the challenge, the amount of French debt held by the Bank of France is already shrinking. The ECB's discontinuation of its debt-purchasing policies, implemented during the sovereign debt crises of the 2010s and the Covid pandemic, means national central banks are gradually redeeming these securities. The Bank of France's stock of securities is expected to fall by €80.6 billion this year, reducing its share of French debt to between 11% and 12%. This decline poses an "existential threat" to Mélenchon's proposal, as there would be less debt available to "write off" or convert into perpetual debt.