On Monday morning, social unrest, political instability, and rising national debt in France weighed on French assets, pressuring government bonds and Paris-listed stocks.
The euro has declined 0.15% against the US dollar and 0.13% against the British pound.
France's 10-year government bond yield rose 7 basis points, remaining near multi-decade highs despite recent declines. Higher yields mean the government faces increased borrowing costs in the debt market. France's 2-year and 30-year bond yields rose 2 and 6 basis points, respectively.
The stock market also came under pressure, with the CAC 40 index falling nearly 1% in early Monday trading. Although only about 15% of France’s revenue comes from domestic sources, its performance has significantly lagged behind that of its European peers in recent years, with bank stocks bearing the brunt of the pressure.
The French stock market has historically been highly sensitive to widening spreads between French OATs and German Bunds—the additional bond yield France pays relative to Germany. This spread has now reached its highest level since the European sovereign debt crisis in the early 2010s. French yields are now higher than those of Italy or Greece, signaling greater risk.
Widening bond spreads have raised market concerns about rising corporate financing costs and intensified fears of higher taxes and stricter regulation. The French stock market was also weighed down by luxury companies, which are facing pressure from slowing high-end consumer spending in China.
Either the bond market is protesting, or the people are protesting.
Last weekend, hundreds of thousands of people took to the streets to protest political deadlock, the cost of living, and the state of public services, including schools and healthcare.
Large-scale gatherings in Paris, Lyon, Marseille, and other cities escalated into violent scenes with buildings and cars set on fire, clashes with police, and over 2,000 arrests.
Mike Bell, Head of Market Strategy at RBC BlueBay Asset Management, said on CNBC’s Squawk Box Europe on Monday: “If you’re an international investor considering whether to invest in French bonds, this doesn’t help.”
Bell said, "It looks like either the bond market is protesting, or the public is protesting, or both."
The share of French debt held by foreign investors is rising, increasing from approximately 48% at the beginning of 2022 to nearly 60% at the beginning of 2026, which could lead to greater volatility in the bond market amid declining risk appetite.
Bell added, "What France needs to do is get its finances in order—they need to raise the retirement age; if the average life expectancy is 84, you can't retire at 62—but if these events happen before they even start discussing it, you can imagine what would happen on the streets of France if they tried to raise the retirement age to... I mean, in the UK it's already 68."
This makes the country appear difficult to govern, and now they need to push through some tough decisions.
Budget challenges
France's benchmark borrowing costs are nearing their highest level since 2002, as investors demand higher risk premiums to finance the country's spending.
Primary concerns include uncertainty surrounding next year’s presidential election—where far-right candidate Marine Le Pen leads in many polls—and whether the minority government led by Prime Minister Sébastien Lecornet can pass the 2027 budget currently under negotiation.
Budget negotiations in France have become increasingly difficult and have led to the departure of Le Corgné's two predecessors.
Analysts say that, given France's historically high budget deficit as a share of GDP and weak economic growth continuing to pressure government borrowing costs, creditors are demanding a robust fiscal consolidation plan to avoid a debt crisis.
Goldman Sachs European equity strategist Sharon Bell said on CNBC’s Squawk Box Europe on Monday: “It’s hard to see the budget deficit coming down without painful measures.”
The tax burden on French companies is likely to rise. I believe the overall tax burden in France may also increase, as fiscal consolidation means either spending less or collecting more taxes—both of which are very challenging.
Le Pen, who is currently leading in the polls, has mentioned maintaining a 'golden rule' for the budget during her term, but she has not truly elaborated on how this would be achieved," Bell continued.
One reason the OAT-Bund spread has not narrowed is that investors doubt they will see any fiscal consolidation or a reduction in the budget deficit.
However, Ken Egan, Senior Director of Sovereign Ratings at KBRA, noted that last week’s bond auction showed that France’s debt “still has very solid underlying demand.”
Overall, it was a more risk-averse morning, but France clearly faced greater pressure... The question the market will ask is how easily France can make progress from here,” Egan said via email.
Impending debt crisis?
Goldman Sachs’ Sharon Bell added that she does not believe the current situation requires an emergency intervention by the European Central Bank, which “does not want” to use tools such as the Transmission Protection Instrument.
However, she noted that if the interest rate differential begins to disrupt market liquidity, the European Central Bank would opt to use this mechanism.
She added that such measures would be politically sensitive and could require France to implement stricter fiscal reforms over a longer period, similar to what Greece, Portugal, and Ireland experienced during the eurozone crisis.
Sometimes market pressure is indeed necessary, and that’s exactly what we’ve seen this year.
Meanwhile, Mike Bell of RBC BlueBay Asset Management said France is facing a "very real" risk of a sovereign debt crisis.
Ultimately, they need to get their finances in order. If you even suggest what truly needs to be done, you won’t get elected; if you try to push these measures without electoral authorization, there will be unrest in the streets.
Bell added that before any intervention, there will be a "sharp conflict" between the next elected official and the European Central Bank. The central bank is unlikely to step in unless countries comply with their excessive deficit procedure, which stipulates that general government budget deficits must not exceed 3% of GDP. France’s current deficit is approximately 5%.
Last week, French Central Bank Governor Emmanuel Moulin told CNBC that the rise in French yields was due to political uncertainty, but he added, "It is possible to bring the deficit back to 3% by 2029, which is also the government's goal."