Following the unrest on Sunday, markets opened on Monday with capital quickly fleeing—French government bonds faced panic selling, equities plunged at the open, and the euro was not spared either…
Following large-scale protests over the cost of living in France that escalated into unrest across multiple regions, investors once again sold off French government bonds. On Monday, French bonds underperformed significantly compared to other European sovereign bonds, with the yield spread between 10-year French and German bonds widening by 8 basis points to 146 basis points, the highest in two weeks; the yield gap between French and Italian bonds also reached a record high. The euro weakened, and France’s CAC 40 index fell as much as 1.2%.
The bond market’s reaction highlights the French government’s dilemma: society demands relief from the cost of living and improved public services, while high debt and deficit levels have limited the government’s room to increase spending. As the 2027 budget is under review by parliament, whether fiscal consolidation can be implemented has become a key variable for investors reassessing France’s credit risk.
Kieran Williams, Head of Foreign Exchange at InTouch Capital Markets, noted that the primary channel through which the situation in France affects the euro is the bond market; until budget prospects become clearer, markets will remain cautious toward the euro, given that the Germany-France spread has already approached 140 basis points.
Cost-of-living protests escalate as fiscal austerity faces greater resistance
Last Saturday, approximately 550,000 people participated in demonstrations across France, with about 110,000 in Paris. Most protests remained peaceful, but later incidents of arson, looting, and clashes with police occurred in some areas. The city hall in Limoges suffered severe damage, and commercial properties were also damaged in cities including Paris, Marseille, Lyon, and Bordeaux.
Reuters reported that weekend unrest led to over 2,400 arrests and nearly 1,000 police and gendarmes injured. On Sunday, Macron delivered a national address, describing the scenes of violence as “shocking,” calling for an investigation into possible failures in intelligence and police preparedness, and permitting local officials to ban certain gatherings when necessary.
The French government needs to significantly reduce its deficit in the 2027 budget. Previously, it planned to achieve approximately €54 billion in fiscal adjustment by freezing wages and pensions in parts of the public sector, adjusting tax incentives, and cutting spending in areas such as healthcare, aiming to lower the fiscal deficit from the projected 5.4% of GDP this year to 5.0% next year.
These measures were already facing resistance from unions, students, and opposition parties. Weekend violence has further increased political pressure: if the government softens the austerity plan, bond markets may question the path to deficit reduction; if it insists on deep spending cuts, social backlash could continue to grow.
Debt has risen to 119% of GDP, and financing costs are nearing their highest level in over two decades.
Currently, France’s fiscal space has significantly narrowed. As of the second quarter, France’s public debt reached approximately €3.6 trillion, equivalent to 119% of GDP—the highest level since World War II. Next year, France is expected to issue around €340 billion in government bonds, both to finance its budget deficit and to refinance debt issued during the pandemic at extremely low interest rates, which are now maturing.
Meanwhile, the yield on France’s 10-year government bond has recently approached 4.9%, a level not seen in over two decades. Mateusz Szczurek, head of the IMF’s European department, stated last week that France’s bond market liquidity, debt maturity structure, and investor base remain relatively stable, and short-term financing risks are “manageable”; however, if high yields persist, they will further strain public finances.
France must reduce its budget deficit to below 3% of GDP by 2029 to comply with EU fiscal rules. EU Commissioner for Economy, Dombrovskis, stated that there are currently no signs of a new sovereign debt crisis emerging in Europe, but France’s timely adoption of its 2027 budget is crucial for restoring clarity to its fiscal outlook.
ECB President Lagarde previously stated clearly that France’s debt issues must first be addressed through domestic fiscal policy, and did not signal that the ECB would directly intervene in the French bond market.
Unrest has turned the budget vote into a new market risk factor.
France’s political structure makes fiscal adjustments more difficult, as Prime Minister Sébastien Lecornu leads a minority government in a deeply fragmented parliament, with presidential elections due in approximately six months. Budget cuts targeting sensitive areas such as pensions, public sector wages, healthcare, and tax incentives leave little room for compromise among parties ahead of the election.
The bond market has not yet become disordered. Both IMF and EU officials believe France faces no urgent short-term debt repayment issues, and the average maturity of European sovereign debt is longer than during the eurozone debt crisis, meaning it will take time for higher yields to translate into higher fiscal interest costs.
But France currently faces the simultaneous tightening of political and fiscal constraints. Society demands that the government allocate more resources to alleviate the cost of living and pressures on public services, while bond investors demand that Paris reduce its deficit and control its debt. The weekend unrest has intensified this conflict, making the successful passage of the 2027 budget a direct test for France’s bond market in the near term.
www.kucoin.com