Unrest in France has heightened investors’ concerns about the country’s fiscal outlook after borrowing costs hit their highest level since 2002 earlier this week.
With further demonstrations planned, fund managers are assessing whether prolonged disruption could weaken growth, undermine confidence and make it harder for the government to implement its planned budget cuts.
Ratings agency Moody’s on Friday maintained France’s credit rating at Aa3, still considered a “high grade” level, but kept its outlook on the country negative.
“The negative outlook reflects the increasing risk that the fragmentation of France’s political landscape will continue to undermine the functioning of the country’s legislative bodies,” Moody’s said in a report.
Moody’s said that if French institutions were able to reduce their budget deficits, the country’s outlook could return to stability.
Will the French government be able to pass a budget?
The French government aims to reduce the budget deficit to 5% of gross domestic product (GDP) in 2027 from a projected 5.4% of gross domestic product (GDP) in 2026. Parliament is scheduled to resume deliberations on October 27 on the budget’s tax measures aimed at generating savings, but opposition lawmakers are resisting the plan.
Alain Duret, head of EMEA economic research at Natixis CIB, said the government was determined to prevent a sharp rise in borrowing costs.
Duret said the government could try to stick to its fiscal targets by invoking Article 49.3 (which allows legislation to be passed in Parliament without a final vote unless MPs pass a no-confidence motion) or by using executive orders.
French 10-year OAT.
This could help calm nerves and restore investor confidence, Duret added, noting that recent pressure on French government bonds has been driven primarily by tactical portfolio reallocation, with traditional buy-and-hold investors “still on the sidelines.”
Benchmark yield 10 year French government bondTreasury bonds, known as OAT, rose 11 basis points on Thursday to their highest level since 2002. As a result, the spread with the 10-year German Bundestag, a benchmark for euro zone debt, was at its widest level since November 2011.
Charlotte de Montpellier, senior economist for France and Switzerland at ING, said the unrest “adds further uncertainty” to the budgetary and political concerns already weighing on French assets and “reinforces the perception that it will be difficult for future governments to achieve the necessary reforms and savings.”
“It remains uncertain whether the 2027 budget will pass Congress,” said Matthew Ryan, head of market strategy at Everly. “Even if that happens, too many concessions on both the left and right will likely leave the budget deficit problem under-addressed.”
How will instability damage France’s growth prospects?
A new demonstration is planned for October 24, and a trade union-backed national day of strikes and protests has been set for November 5, with some protesters from the anti-establishment group Yellow Vests calling for more rallies.
CAC40.
In a note written on October 20 in response to last weekend’s violence, de Montpellier said that while markets can weather temporary disruptions, “a sustained loss of confidence could have a larger impact.”
“These events further darken an already unfavorable economic outlook,” she said. “We had forecast French GDP growth of just 0.3% in 2026 and 0.6% in 2027. Growth could slow further if instability continues, confidence deteriorates further, or market tensions increase.”
According to INSEE estimates cited by de Montpellier, the yellow vest movement may have reduced France’s GDP growth by 0.1 percentage points in the fourth quarter of 2018. Industrial action during the spring 2023 pension protests reduced GDP growth by about 0.1 percentage point in the first quarter, according to Banque de France.
She said in an Oct. 20 memo that the violence could drive households away from urban centers, cause tourists to postpone trips and businesses to delay investments.
Duret said consumer confidence in France was already near historic lows before the recent protests, leaving little room for the country to absorb new macroeconomic shocks.
He added that the turmoil raises “two important red flags” for the market.
“Firstly, there is a risk that prolonged disruption will derail GDP growth. Second, there are concerns that political pressure will derail the government’s major spending cuts plans. In either case, the budget deficit will widen and exceed the government’s 5% GDP target.”
Which sectors of France are most at risk?
french CAC40 It has fallen 4.5% in the past month. ING named retail, hospitality and tourism, and transport and logistics as the sectors most directly exposed to disruption.
Mr de Montpellier said stores and shopping centers were facing reduced foot traffic, closures and declining sales. Hotels, cafes, restaurants and travel services risk losing activities where customers are unlikely to change their plans. He added that if the disruption continues, transportation and logistics could also be hit.
Carrefour.
carrefour Shares fell more than 14% on Wednesday after the supermarket giant cut its profit outlook and cut investment, citing rising energy costs and social unrest weighing on consumer sentiment. CEO Alexandre Bompard said the country was facing an “unprecedented situation”.
More than 2,000 companies were directly affected by Tuesday, ING said, citing estimates from France’s network of chambers of commerce.
Kevin Tozette, a portfolio advisor and investment committee member at Carmignac, said the impact could extend far beyond the companies most directly exposed to the turmoil.
LVMH.
“In the case of equity, this does not help banks given the high cost of equity. On the other hand, prolonged uncertainty could slow loan growth and cause credit problems,” he told CNBC via email.
France’s prestigious luxury goods sector earns most of its sales overseas. LVMH Direct exposure to the French market is relatively limited, with France accounting for only 8% of sales in 2025. But the demonstrations could have an impact on tourism and, by extension, duty-free purchases, which account for about 20% of LVMH’s revenue in France, Tozet said.
“Another six months of political vacuum is a very long time for markets, the economy and entrepreneurs,” he added.
