Egan-Jones Analyzes French Proposal to Cancel Central Bank Debt Holdings

Credit rating agency Egan-Jones has released an analysis examining a proposal for France to cancel government debt held by its central bank. The analysis assesses the potential credit consequences for France, a sovereign whose debt already exceeds 116 percent of its GDP.

According to Egan-Jones, conventional remedies for France's debt situation are constrained. The country already faces one of the highest tax burdens in the OECD, and further increases risk reducing, rather than raising, receipts. Spending cuts carry political costs due to an aging population, a rising dependency ratio, and past unrest over reform attempts. Furthermore, France's membership in the euro monetary system limits its ability to issue its own currency.

The analysis reviews a proposal by Jean-Luc Mélenchon to have the central bank cancel bonds acquired under eurozone quantitative easing programs, effectively extinguishing the debt without a formal default. Egan-Jones compares this scenario to the currency expansion of the Weimar Republic, as canceling the bonds would remove an asset from the central bank while the currency remains outstanding.

The European Central Bank considers such a move prohibited monetary financing under Article 123 of the EU treaty. Egan-Jones notes that borrowing costs could rise if investors question the arrangement. Egan-Jones maintains a senior rating of A+ on the French Republic. The country's debt is projected to approach 120 percent of GDP in 2026. The firm views outright cancellation as unlikely, anticipating governments will act only when forced by circumstances such as rising yields or funding difficulties.