WASHINGTON (Reuters) - The European Central Bank can supply cash to banks if Sunday’s presidential vote in France roils markets but suppressing a rise in governments’ borrowing costs would go beyond its remit, ECB policymaker Ignazio Visco said on Saturday.
Investors fear that a potential run-off between eurosceptic candidates Marine Le Pen and Jean-Luc Mélenchon would raise questions about France’s future in the euro zone and the very survival of the euro.
This may in turn drive out bank deposits and push up borrowing costs, as measured by bond yields, for debt-laden governments such as Italy, as happened during the 2010-12 debt crisis.
“The problem is more long term and has to do with what happens to spreads (between government bond yields in different countries) but this transcends monetary interventions,” Visco, who heads the Bank of Italy, told reporters at the International Monetary Fund and World Bank spring meetings.
The ECB is on course to buy 2.3 trillion euros ($2.47 trillion) worth of mostly government bonds to boost inflation in the euro zone but is barred by European treaties from directly financing governments.
Le Pen promised a referendum on France’s euro membership while Mélenchon vowed to end the independence of the ECB, which is in charge of controlling inflation in the euro zone, and overhaul the European Union or hold a referendum to leave it.
As France is the euro zone’s second-largest economy, many fear its departure would cause the whole currency club to collapse.
Visco and his Austrian counterpart Ewald Nowotny said the ECB was ready to provide lenders with Emergency Liquidity Assistance, a lifeline used to prop up the Greek banking sector, but expressed confidence that this will not be needed.
“If there should be problems for specific French banks liquidity-wise, then the ECB has the ... ELA, Emergency Liquidity Assistance, but we don’t expect of course any special movements,” Nowotny said in Washington.
Speaking later at the IMF, French central bank governor François Villeroy de Galhau declined to comment on any post-election scenario and said Visco’s and Nowotny’s comments “were only binding for them.”
French banks currently have more cash than they need. ECB data shows they had parked 174 billion euros at the ECB in addition to their mandatory reserves as of March 3, the latest day for which data is available.
French centrist Emmanuel Macron and far right leader Le Pen were level on 23 percent of voting intentions, according to a BVA poll published on Friday.
However, neither is totally assured a spot in the May 7 runoff round as both conservative Francois Fillon and hard-left candidate Mélenchon were following them closely.
Nowotny said “hysteria” surrounding the French vote was overdone.
Speaking alongside him, Austrian finance minister Hans Jörg Schelling said any market turmoil after Sunday’s vote was likely to be short-lived and the Eurogroup of the euro zone’s finance ministers would not react to it.
“From the experience of the past, this reaction of markets is a very short one,” Schelling said. “I don’t think there is any reaction from the Eurogroup.”
($1 = 0.9326 euros)
Reporting by Francesco Canepa; Editing by Chizu Nomiyama and Andrea Ricci