Deteriorating debt fundamentals are a known long-term risk, but markets often remain complacent until a specific political event, like an election or leadership change, acts as a trigger. These upheavals force an immediate re-evaluation of what is sustainable, transforming abstract fiscal worries into concrete, costly market volatility.
Despite the ECB's powerful TPI backstop, it's unlikely to be used for France. Market turmoil there is driven by fundamental concerns over France's own lack of fiscal consolidation, not an external shock. This highlights a crucial limit of central bank intervention: safety nets are not designed to solve domestic political and fiscal failures.
The election of Sinei Takechi is causing markets to anticipate a more activist fiscal agenda in Japan. This includes inflation relief and strategic investments. Paradoxically, this expectation of fiscal stimulus is simultaneously reducing pressure on the Bank of Japan for near-term interest rate hikes, creating a dual impact on the country's economic outlook.