PARIS, Aug 26 (Reuters) - France's political class has been roiled in recent years by its attempts to rein in the country's increasingly heavy debt load. Far-left presidential candidate Jean-Luc Melenchon has a simple but highly divisive idea: cancel it.
Melenchon, of the France Unbowed party (LFI), has revived his calls for the central bank to cancel its holdings of French debt.
"All we have to do is take the 18% held by the Bank of France and chuck it in the fire," he has said on the campaign trail.
Melenchon has yet to detail his plan, but its central idea is that such an operation would allow France to reduce its headline public debt ratio - now at over 116% of GDP - creating more room for public spending.
His unorthodox solution to France's fiscal woes is part of a package of policies that are proving a hit with some voters.
A poll on Monday showed Melenchon poised for a run-off with far-right leader Marine Le Pen in next year's presidential election, ahead of mainstream candidates.
The idea is not new. Most recently during the COVID-19 pandemic some economists and politicians called for the European Central Bank to cancel government bonds it bought from commercial banks to prop up the euro zone economy.
However, such proposals have been rejected in the past, with policymakers arguing that they would lead to a central bank effectively financing a government, which European Union treaties expressly forbid, while also hurting market confidence.
Melenchon's latest call is provoking a similar backlash.
Prime Minister Sebastien Lecornu, who became France's fifth prime minister in under two years after two of his predecessors were toppled over efforts to tame the deficit, described the proposal as "fraud in its purest form" and warned it would hurt households and businesses.
With France needing to borrow record sums, Lecornu warned that even flirting with the idea could spook investors.
"If France, which needs to raise 310 billion euros ($361 billion) this year, were to renege on its own signature, who would still lend to us? At best, lenders - if they agree to lend at all - will demand exorbitant interest rates," Lecornu said on X.
Melenchon's team did not immediately respond to a request for comment.
TAXPAYER ON THE HOOK
The Bank of France declined to comment, but its ex-governor Francois Villeroy de Galhau has previously said cancelling government bonds on its books would force France to give up the euro, saddling the central bank with a huge loss that the French taxpayer would have to cover.
Not all, however, have balked at the idea.
Left-leaning investment banker Matthieu Pigasse, who recently won a mandate to restructure Venezuela's huge debt, backed Melenchon. At the summer conference of the LFI party last weekend, Pigasse said that bonds held at the Bank of France could be cancelled "without any economic or financial impact."
His comments sparked a testy exchange on X with former IMF chief economist Olivier Blanchard, who called the debate "idiotic."
Blanchard said that if the Bank of France cancelled French bonds, it would no longer earn interest or profits that would otherwise be returned to its sole shareholder, the French state, rendering the move moot in bookkeeping terms while shaking private investors' confidence.
While he acknowledged that France's deficit was too large, "proposing false solutions, raising false hopes, is ... irresponsible," he said.
($1 = 0.8572 euros)
(Reporting by Leigh ThomasEditing by Tomasz Janowski)
