Street flames spread to the bond market, pushing France's fiscal predicament to the brink of the cliff.

Notice that after a weekend of violent unrest, French government bonds fell, highlighting the tension between protesters angered by the cost of living and a government that lacks the fiscal room to spend its way to stability. French government bonds underperformed those of other European countries, with the spread between 10-year French and German bonds widening by as much as 8 basis points to 146 basis points, the highest in two weeks. The spread versus Italian bonds hit a record, while the euro weakened and the CAC 40 index fell 1.2%. Over the weekend, a wave of attacks targeted public buildings, shops and restaurants in many parts of France. However, a mountain of debt and one of the largest budget deficits in the euro area mean the government cannot simply calm the public by increasing spending. Louis-Vincent Gave of Gavekal Research said, "France today is facing a social crisis, an immigration crisis, an energy crisis, an economic crisis and a fiscal crisis all at once." "And all of this is happening when the French president is 'in office but without power.' Nothing that happened this weekend seems to point in any direction that would support a higher euro or push French government bond yields lower." Unrest continues, French bond risk premium may rise again Investors increasingly view French government bonds as riskier than German bundsthe latter typically seen as the safest borrower in the euro area. The French-German spread is approaching 150 basis points, moving further into territory associated with the euro-area debt crisis. During the most intense phase of the recent French bond selloff, the spread came close to 160 basis points. The protests come as French politics debates the 2027 budget. The government's bill includes 43 billion euros (about $48.2 billion) in deficit-reduction measures. Reaching a compromise in a deeply divided parliament would be difficult in any case, and it may be even harder with only six months until the presidential election. The euro fell as much as 0.5% to $1.1183, the worst performer among Group of Ten currencies. Despite a brief rebound last week, traders remain bearish on the euro's outlook, and the cost of hedging against further euro depreciation has climbed sharply. Commerzbank strategist Erik Leem said, "Although the violent protests do not represent the vast majority of the population, the weekend's developments still highlight the difficult balance the government faces between reassuring the public and reassuring the markets." Moody's will review France's sovereign rating on Friday, offering another gauge of the country's fiscal health. Given its negative outlook, a downgrade is seen as the more likely next step. Moody's currently rates France one notch higher than Fitch and S&P Global.