France’s riots have prompted investors to assess the risk of a damaging shock to the country’s bond market, as unrest across several cities fuels concerns over government spending, political stability and rising national debt.
Demonstrators looted shops in Paris, stormed the city hall in Marseille, and set fire to the city hall in Limoges. The tourism office in Lyon was also torched, while thousands of people were arrested.
The protests began with demands for increased education funding but have since broadened into a wider set of grievances. Many demonstrators have been seen carrying Palestinian flags.
Investors assess a possible French bond market crisis
Analysts at Macquarie have outlined a potential chain of events if the French authorities fail to restore stability and agree to demands for greater public spending.
They said the initial risk could be a breakdown in governance, potentially including the dissolution of the National Assembly before an April election. Credit rating agencies could then downgrade French debt in November, while protests and violence spread further.
That could lead to another sharp rise in French bond yields, with the possibility of turbulence spreading into other asset classes. The most serious scenario would be the election of a far-right populist administration, creating a deeper crisis of confidence in the state’s ability to pass measures aimed at reducing its budget deficit.
The market concerns come as France faces pressure over its public finances. Investors are assessing whether political turmoil could force the government to increase spending, worsening the country’s debt position and making it more expensive to borrow.
Ricardo Amaro of Oxford Economics said the impact of higher French borrowing costs would be uneven across the eurozone. If a substantial rise in yields spread to other highly indebted countries, France and Italy could enter moderate recessions, he said.
Spain, Portugal and Greece could outperform in that scenario, Mr Amaro added, while the eurozone as a whole would avoid a recession.
The unrest has therefore become a focus for financial markets beyond France, with investors watching for signs that political instability could translate into higher borrowing costs and broader contagion.
