What next for France as riots rattle markets? Three questions facing investors ahead of more protests

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.

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.

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.”

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 those calling for further rallies.

In a note on Oct. 20 after the violence of the previous weekend, de Montpellier said that, while the market can look past short-lived disruption, “a lasting loss of confidence can have a bigger impact.”

“These events further darken an economic outlook that was already unfavorable,” she said. “We had expected French GDP growth of just 0.3% in 2026 and 0.6% in 2027. If the unrest continues, confidence deteriorates further or market tensions intensify, growth could be even weaker.”

The Yellow Vest movement may have reduced French GDP growth in the fourth quarter of 2018 by 0.1 percentage point, according to an INSEE estimate cited by de Montpellier. Industrial action during the spring 2023 pension protests reduced first-quarter GDP growth by around 0.1 percentage point, according to the Banque de France.

In her Oct. 20 note, she said violence could keep households away from city centers and prompt tourists to postpone trips and businesses to delay investment.

Durré said French consumer sentiment was already near historic lows before the latest protests, leaving little room for the country to absorb a fresh macroeconomic shock.

He added the unrest raises “two key red flags” for markets.

“First, the risk that prolonged disruption drags on GDP growth. Second, fears that political pressure could derail government plans for critical spending cuts … Either way, that would widen the deficit and blow past the government’s 5% GDP target.”

France’s CAC 40 has fallen 4.5% over the past month. ING identified retail, hospitality and tourism, and transport and logistics as the sectors most directly exposed to the turmoil.

De Montpellier said shops and shopping centers face lower footfall, closures and lost sales; hotels, cafés, restaurants and travel services risk losing activity that customers are less likely to reschedule. Transport and logistics could also be hit if disruption persists, she added.

Carrefour shares plunged more than 14% Wednesday after the supermarket giant cut its profit outlook and reduced investment, citing the unrest — along with rising energy costs — as a drag on consumer sentiment. CEO Alexandre Bompard said the country faces an “unprecedented situation.”

More than 2,000 businesses had been directly affected by Tuesday, ING said, citing estimates from France’s network of chambers of commerce.

The impact could extend well beyond companies most directly exposed to the unrest, said Kevin Thozet, portfolio advisor and member of the investment committee at Carmignac.

“For equities, this does not help banks, given the higher cost of equity, while prolonged uncertainty can slow loan growth and create credit problems,” he told CNBC via email.

France’s prestigious luxury sector generates most of its sales abroad. LVMH has relatively limited direct exposure to the French market, with France accounting for just 8% of its 2025 revenue. But the demonstrations could weigh on tourism and therefore tax-free purchases, which account for around 20% of LVMH’s revenue in France, Thozet said.

“A further six months of political vacuum is a very long time for markets, the economy and entrepreneurs,” he added.