France’s riots hit markets. Here are 3 big questions facing investors
France’s unrest is fueling investor concerns over 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 deliver planned budget savings.
Rating agency Moody’s on Friday kept its Aa3 credit rating on France, a level it still deems “high grade,” but maintained its negative outlook on the nation.
“The negative outlook reflects the increased risk that the fragmentation of France’s political landscape will continue to impair the functioning of the country’s legislative institutions,” Moody’s said in its report.
Moody’s noted that it could return France’s outlook to stable if its institutions can narrow its budget deficit.
Can France’s government pass its budget?
France’s government aims to reduce the budget deficit to 5% of GDP in 2027, from a projected 5.4% in 2026. The National Assembly is due to resume debating on the budget’s tax measures, which are intended to generate savings, on Oct. 27 but opposition lawmakers are resisting the plans.
Alain Durré, head of EMEA economic research at Natixis CIB, said the government was determined to prevent a sharp rise in borrowing costs.
Durré said the government could try to stick to its fiscal targets by invoking Article 49.3 — which allows it to push a bill through the assembly without a final vote unless lawmakers can pass a no-confidence motion — or by using executive ordinances.
France 10-Year OATs.
That could help settle nerves and restore investor confidence, Durré added, noting that recent pressure on French sovereign debt has been driven primarily by tactical portfolio reallocations, with traditional buy-and-hold investors “still sitting on the sidelines.”
The yield on benchmark 10-year French government bonds, known as OATs, climbed 11 basis points Thursday to its highest level since 2002. That pushed the spread over 10-year German Bunds — the benchmark for euro zone debt — to its widest level since November 2011.
Charlotte de Montpellier, senior economist for France and Switzerland at ING, said the unrest “adds another layer of uncertainty” to the budgetary and political concerns already weighing on French assets, and “reinforces the perception that any future government will find it difficult to deliver the reforms and savings required.”
“It remains unclear whether the 2027 budget will clear parliament,” said Matthew Ryan, head of market strategy at Ebury. “Even if it does, it seems set to be so riddled with concessions to both the left and the right that the deficit problem is left insufficiently addressed.”
What damage will the unrest do to France’s growth outlook?
Fresh demonstrations are planned for Oct. 24, and a union-backed national day of strikes and protests is set for Nov. 5, with anti-establishment Yellow Vest protestors among…
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