Europe faces the threat of a new sovereign debt crisis as global financial markets exhibit concerning patterns, with long-term government bonds from major economies including France experiencing selling pressure, as rising yields increase refinancing costs for heavily indebted nations.
Current French political instability is exacerbating the crisis, with a confidence vote on Prime Minister François Bayrou's austerity budget expected to fail on September 8, leaving the country facing political chaos and planned general strikes. Germany, once praised for its conservative fiscal policies, has now opened the door to severe market turbulence through trillion-euro debt programs. Since the monetary union's establishment, markets have closely linked EU overall credibility with German credibility, and any sacrifice of German credibility will drag down its EU partners.
The next round of European debt crisis may not be far away. The European Central Bank is preparing to deploy its emergency toolkit to address the crisis, including Long-Term Refinancing Operations and Emergency Liquidity Assistance measures, aimed at stabilizing government bond markets and preventing banking sector contagion.
Global Bond Markets Under Pressure, France at the Storm's Center
Long-term government bonds are experiencing widespread selling. Long-term government bonds from major economies including the United States, Japan, the United Kingdom, and France all face selling pressure, causing yields to climb.
The stability of the global financial architecture is built on the foundation of long-term bonds from the US, Japan, and the eurozone, with banks, sovereign pension funds, and insurance systems already suffering heavy losses from selling in this sector.
Long-term government bonds, once viewed as safe and capable of generating positive real returns, have significantly lost market confidence. French political turmoil and Britain's decline demonstrate that in aging European societies under heavy immigration pressure, escaping the debt spiral of continuously growing annual deficits and collapsing social systems appears extremely unrealistic.
The French crisis is rapidly deteriorating, with a confidence vote on Prime Minister François Bayrou's austerity budget expected to fail on September 8, leaving the country facing political chaos and planned general strikes.
Analysis suggests that France has already become a difficult country to govern and now risks becoming the starting point of the next eurozone debt crisis. Investors with no legal obligation to hold these securities are selling, fleeing to so-called safe-haven assets such as precious metals or cash, typically US dollars or Swiss francs.
Germany will not be immune either. This country, once praised for its conservative fiscal policies, has opened the door to severe market turbulence through trillion-euro debt programs. If Germany sacrifices its credibility to buy time and temporarily repair social system crises, it will drag down its EU partners.
ECB Emergency Toolkit
The next debt crisis may follow the pattern of the crisis from 15 years ago: contagion spreading from one country to another, with each country facing stability and resilience tests amid bond selling waves.
Notably, every sovereign debt crisis is also a banking crisis. A significant portion of government bonds are held on commercial bank balance sheets, and sharp declines in market value could lead to dangerous over-leverage across the entire financial sector.
The ECB has developed a series of liquidity and stability measures that form the core of its emergency toolkit. These measures include Long-Term Refinancing Operations (LTRO) and Targeted Long-Term Refinancing Operations (TLTRO), providing banks with long-term low-interest loans to ensure liquidity. There is also Emergency Liquidity Assistance (ELA), providing a safety valve for institutions facing acute stress, typically collateralized by government bonds or other high-quality assets.
The ECB's main focus remains stabilizing government bond markets—the most vulnerable sector during crises.
Emergency plans include the Public Sector Purchase Programme (PSPP), which increases liquidity by purchasing government bonds; Outright Monetary Transactions (OMT) activated only when affected countries commit to reforms; and the newly introduced Transmission Protection Instrument (TPI) allowing the ECB to purchase bonds to reduce excessive yield spreads between member states.
This instrument largely operates in secrecy: market interventions are not always immediately visible and may be implemented gradually through proxies to avoid market panic. ECB policy can be simply summarized as: before imminent debt collapse, its mission is to manipulate the entire yield curve downward, maintaining the illusion of controlling public debt.
Behind-the-scenes transactions between the ECB and major capital pools have become routine, with markets being actively managed and manipulated—free markets and the constraining forces of rising interest rates no longer exist.