France rejects debt cancellation plan

Melenchon has argued that the debt held by the Bank of France could be wiped out to free up room for social spending. Moulin dismissed that logic, saying it would circumvent treaties and fail to solve the underlying problem. “We have never defaulted on our debt since 1797 and that would be a default,” he said.

For markets, the issue is less about whether the proposal can be enacted than about what it says on the campaign trail in a country with a large debt load and a heavy financing requirement. Any serious move toward debt write-offs would likely lift French sovereign risk premia, pressure the euro and complicate the ECB’s task at a time when European rates remain a key transmission channel for financial conditions.

The broader backdrop is that investors are already sensitive to any sign of fiscal loosening in the euro zone. French bond yields, euro trading and banks with exposure to domestic sovereign debt could all react if the debate hardens into an election issue, especially if lenders start to price in a higher probability of confrontation with EU rules.

For now, Moulin’s rebuke and Lagarde’s warning reinforce the market view that a debt cancellation would be politically explosive and financially costly. The next catalyst is whether Melenchon’s proposal gains traction in the presidential race or is sidelined by France’s mainstream parties and fiscal authorities.