Melenchon's Debt Cancellation Plan Draws Sharp Rebuke From French PM

France's presidential race has taken a contentious turn over fiscal policy, as far-left candidate Jean-Luc Melenchon pushes a radical solution to the nation's mounting debt burden: simply cancel it.

Melenchon, leader of the France Unbowed party, has revived his proposal for the Bank of France to write off its holdings of French government bonds. He argues that eliminating the roughly 18% of national debt held by the central bank would slash France's public debt ratio, currently above 116% of GDP, and free up resources for public spending.

The idea has gained traction with some voters. A recent poll suggested Melenchon could face far-right leader Marine Le Pen in a presidential run-off, ahead of mainstream contenders.

However, the proposal has drawn sharp criticism from Prime Minister Sebastien Lecornu, who called it "fraud in its purest form" and warned it would harm households and businesses. With France needing to borrow a record €310 billion this year, Lecornu cautioned that even entertaining the idea could spook investors.

"If France, which needs to raise 310 billion euros this year, were to renege on its own signature, who would still lend to us?" Lecornu wrote on X, adding that lenders would demand exorbitant interest rates if they agreed to lend at all.

The concept is not new. During the COVID-19 pandemic, some economists and politicians floated similar proposals for the European Central Bank to cancel government bonds it had purchased from commercial banks. Such ideas were previously rejected because EU treaties explicitly prohibit central banks from financing governments, and policymakers argued they would undermine market confidence.

Francois Villeroy de Galhau, a former Bank of France governor, has previously warned that cancelling government bonds would force France to abandon the euro and saddle the central bank with massive losses that taxpayers would ultimately cover.

Not everyone opposes the idea. Left-leaning investment banker Matthieu Pigasse, who recently won a mandate to restructure Venezuela's debt, backed Melenchon at a party conference, arguing that cancelling bonds held by the Bank of France could be done "without any economic or financial impact."

His comments sparked a heated exchange with former IMF chief economist Olivier Blanchard, who dismissed the debate as "idiotic." Blanchard noted that if the Bank of France cancelled French bonds, it would lose interest income and profits that would otherwise flow back to the French state, making the move a wash in accounting terms while shaking private investor confidence.

While acknowledging France's deficit is too large, Blanchard said "proposing false solutions, raising false hopes, is irresponsible."