Paris on Fire... French Bond Yields Hit 24-Year High [Click e-Stock]

Political and fiscal instability heightens downgrade pressure
All eyes on Moody's "credit report card" on Oct. 23

As large-scale protests continue to erupt across France, yields on French 10-year government bonds have risen to their highest level since 2002. Political uncertainty, combined with structural fiscal vulnerabilities, is also intensifying pressure for a downgrade of the country's credit rating, which assesses its ability to repay its debt.

On Oct. 20, Moon Seohyun, a researcher at Shinhan Securities, said, "As expectations for fiscal improvement and the prospects for political compromise have weakened, the risk of a further downgrade of France's sovereign credit rating by Moody's, ahead of its Oct. 23 review, has increased."

Rising government debt and growing interest costs

At a protest in Paris, France, on the 17th (local time). Xinhua, Yonhap

France does not have the highest government debt ratio in the eurozone. The problem, however, is that its debt is rising rapidly. According to the fiscal projections in the government's budget proposal, government debt is expected to rise from 115.7% of gross domestic product (GDP) in 2025 to 119.3% in 2026.

Interest costs are also substantial. France paid €64.7 billion in interest alone last year, equivalent to about 42% of its total fiscal deficit. The figure is projected to rise to €79.2 billion this year, while the deficit is expected to reach 2.8% of GDP even excluding interest payments.

Financial markets are also reflecting this situation. The spread between French and German 10-year government bond yields has widened to around 1.5 percentage points, its highest level since the European debt crisis. This means investors buying French government bonds are demanding higher interest than they would for German bonds, a premium known as the "risk premium."

Budget deadlock adds to downgrade pressure... Limited impact on the financial sector

The government has included €54 billion in fiscal consolidation measures, which involve cutting spending and increasing tax revenues, in its 2027 budget proposal. It plans to reduce the fiscal deficit from 5.4% of GDP in 2026 to 5.0% in 2027. However, no bloc holds a majority in the National Assembly, and political divisions are continuing ahead of the presidential election, making it difficult for the proposal to pass as drafted.

Moody's currently assigns France an Aa3 rating with a "negative" outlook. The other international credit rating agencies, S&P and Fitch, downgraded France to A+ last year and have maintained a "stable" outlook; S&P's next review is scheduled for Nov. 27. However, Moon said, "Since budget deliberations will still be underway on Oct. 23, the possibility remains that Moody's will maintain the rating and wait to see the outcome of negotiations."

Moon believes that even if the rating is downgraded, the impact on the financial sector will be limited. Even if Moody's lowers France's rating by one notch, from Aa3 to A1, the haircut applied when government bonds are pledged as collateral to the European Central Bank (ECB) will not change. French government bonds will also retain their status under bank capital and liquidity regulations.

"Our base-case scenario is that the budget will be approved through political compromise, Moody's will lower its rating by one notch, and S&P and Fitch will maintain their ratings," Moon said. "Considering the liquidity of the government bond market, the long average maturity of the bonds, and the ECB's capacity for a conditional response, we believe a prolonged French risk premium is more likely than a eurozone systemic crisis."

Arson and looting in Paris and other major cities... Protests escalate into riots

The protest scene in Paris, France, on the 17th (local time). Xinhua-Yonhap

Meanwhile, protests in France are spiraling out of control.

According to foreign media reports on Oct. 19 (local time), large-scale protests sweeping across the country have been marred by looting and arson, escalating into riots.

The protests began as rallies by high school students demanding improvements to poor educational conditions. They later grew into anti-government demonstrations over economic issues, including high prices, and have now escalated into riots, with government offices and shops being vandalized and set on fire.

As unrest erupted simultaneously in major cities across the country, the police response has also come under scrutiny.

According to the French Ministry of the Interior, more than 550,000 people took to the streets on Oct. 17 alone and took part in around 110 protests. The General Confederation of Labour (CGT) estimated the number of participants at 800,000. In the capital, Paris, shops and banks were among the targets of looting.

This content was produced with the assistance of AI translation services.