The Proposal on the Table
Presidential candidate Jean-Luc Mélenchon is pitching the cancellation of government debt owned by the Banque de France and the European Central Bank. In a Thursday note, Bloomberg Economics' Jean Dalbard and Bhargavi Sakthivel weighed how that would play out.
"Strip away the legal, political and economic hurdles, debt cancellation may look like an easy way to lighten the burden," they wrote. "But canceling debt the state effectively owes itself is unlikely to create meaningful fiscal space."
What the Analysis Finds
Because the bonds in question pay low coupons, the economists say the upside would be meager even if investors did not react at all. Their math shows that an increase of 75 basis points in French yields alone is enough to eliminate the modest fiscal benefit.
They judge a bigger shift in market sentiment to be highly probable, and in that scenario they conclude the state would face higher interest costs than if no cancellation happened. Their work also considers a setup where writing off the Banque de France's quantitative easing holdings is accompanied by selling from private bondholders. The calculations look at debt-servicing costs from the Treasury's point of view, without consolidating flows.
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The Hidden Cost to the Treasury
Dalbard and Sakthivel highlight a second channel the plan overlooks: the Banque de France typically sends income back to the government via dividends and corporate taxes. "Once quantitative tightening ends and the bond portfolio is gradually renewed at higher yields, those payments to the Treasury should increase," they said.
They further note that scrapping those bonds could cut the Banque de France's long-run income by up to €6.7 billion ($7.8 billion) annually, roughly 0.2% of GDP.
Why This Matters Beyond the Headlines
If you hear "debt cancellation" and think instant breathing room, this analysis is a cold shower. The headline move targets low-coupon bonds, the market could make borrowing pricier, and the state would likely forgo central bank income that normally flows back to the budget. The net of all that: less fiscal space than advertised, and potentially higher interest costs for the government.
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