The Times They Are A-Changin’: “Aux barricades !” 

 

 

“Did you see the stylish kids in the riot?
They were shovelled up like muck, set the night on fire” 

 

Today we discuss the potential Frech debt riots, and consider whether this is the second leg of the Eurozone debt crisis. 

 

The first began in late-2009 when Greece disclosed massive budget deficits, threatening the stability of the entire eurozone. 

The root of this was member states sharing the Euro and common interest rate without unified tax and spending rules. The crisis was driven by lenders losing confidence and demanding higher borrowing costs, as governments struggled with the cost of post-GFC bailouts for the failed real estate and banking sectors. 

 

Those affected included: 

 

• Greece (2010 & 2012): Rescue packages of C.€200 billion from the EU and IMF. 

• Ireland (2010): an €85 billion EU-IMF bailout. 

• Portugal (2011): €78 billion rescue package. 

 

The crisis abated in July 2012, when the then ECB president, Mario Draghi, pledged to do “Whatever It Takes.“ 

The second leg looks far more threatening as this time it is France, Europe’s second largest economy, which is valued at $3.37 trillion, C.20% of the Eurozone total. By comparison the bailed-out countries are minnows: Ireland, $722 billion; Portugal, $347 billion; Greece, $281 billion 

France could be the next back swan event, because it doesn’t control its own currency and cannot print money to bail itself out. 

 

‘France could be the next back swan event’

 

France’s problem aren’t new, and included increasing public debt, a high budget deficit, and a political landscape that offers no easy solutions creating uncertainty around the 2027 budget.  

Unsurprisingly, bond yields on her bonds are rising exponentially; on October 2, 2026, the yield spread between ten-year French and German bonds reached C.149 basis points, its highest level since the Eurozone debt crisis in 2012. 

These increased yields come at a time when the French Treasury needs to refinance a large volume of older debt while covering persistent fiscal deficits. 

Public debt has grown significantly since the pre-pandemic era and is now close to 120% of GDP. Contributing factors include, the cost of Covid, the energy crisis, state aid, increased social spending.  

The European Commission forecasts France’s fiscal deficit at C.5.1% of GDP for 2026, rising to 5.7% in 2027 if additional measures are not taken. This would lessen the government’s room for manoeuvre, as rising debt servicing costs reduce the funds available for public investment, social policy, defence, and growth initiatives. This is further exacerbated by mundane economic growth. 

At the centre of the crisis is the 2027 budget of PM Sébastien Lecorn, which aims to cap the deficit at 5% of GDP. This includes savings totalling €54 billion, based on spending cuts and tax increases.  

Markets haven’t reacted positively, yields remain high, due, in part to scepticism as to whether the proposed savings are sufficient, and concerns around the support required for the proposal to pass into law.  

The government may be forced to utilize Article 49.3 of the French Constitution, which permits passing legislation without a standard vote, albeit at the risk of triggering a no-confidence motion . Alternatively, failing to pass the budget on time could lead to temporary measures and delays in implementing fiscal policy.  

The forthcoming presidential elections in April and May 2027 add further uncertainty, with the economy, taxation, and public spending taking centre stage.  

The rise of anti-establishment forces complicates prospects for a stable fiscal compromise. Both Marine Le Pen and Jean-Luc Mélenchon represent distinct political directions, but the presence of strong opposition blocs makes building a broad consensus around a multi-year adjustment program far more difficult.  

 

‘France’s problem aren’t new, and included increasing public debt, a high budget deficit, and a political landscape that offers no easy solutions’

 

The ECB could use the Transmission Protection Instrument (TPI) to counter unwarranted and disorderly dynamics in sovereign bond markets, although this not guaranteed. Recent statements by ECB officials emphasize that monetary policy is not intended to artificially suppress a specific country’s borrowing rates. The Bank of France has similarly warned that addressing fiscal troubles is the sole responsibility of the national government and parliament. The stark reality is that, if financial markets conclude that fiscal policy remains inadequate, the ECB alone will not suffice to restore investor confidence. 

France is not currently at the point of immediate default,  however, markets are demanding clearer answers regarding the future course of its public finances. The ultimate success of the 2027 budget will depend not only on the size of the targeted savings, but on the political capability to implement them.  

The pre-election climate threatens to stall decision-making, while uncertainty over the next administration could keep pressure on bond prices. If the government succeeds in convincing markets that it has a credible, workable plan to rein in the deficit, current pressures may prove manageable. If, on the other hand, political infighting blocks necessary action and markets begin to doubt the medium-term sustainability of debt, France could enter a prolonged cycle of financial strangulation.  

 

‘one summarised France “as being unable to sort anything without a revolution‘

 

Greece in 2009 showed that sovereign debt crises do not always start with a sudden crash, but often follow a period where markets incrementally adjust their demands while political leadership struggles to act. 

Many years ago during a fund manager meeting, one summarised France “as being unable to sort anything without a revolution.” 

Perhaps a little harsh, but they have a predilection for taking to the barricades. 

Last week, we saw thousands of teenagers demonstrating outside schools across the country, as some 900 demonstrations, blockades and related incidents were under way outside high schools around the country, shutting > 160 schools, with access to C.30 university campuses blocked, including Paris and Marseille. 

Students’ unions say the education system is underfunded and neglected. Hundreds of high schools were closed or barricaded on Friday, and hundreds of young people have been arrested as the movement threatens to roll on into this week. 

Their discontent centred around the lack of state investment in education, overcrowded classes of up to 40 children in crumbling buildings, poor teacher pay, staff absences and an unequal system in which social background determined success. Other reasons, included the opaque and difficult online system for university applications as well as the unbearable temperatures in classrooms during the heatwaves in May and June. 

 

‘we had the EU dream ticket; full membership and no Euro. We might not be so lucky if we try to realign with Europe!’ 

 

The government said the grievances were legitimate but condemned what it called “urban violence”. 

Nearly 3,000 lycée students – aged between 15 and 18 – have been detained since the start of the protests, along with injuries to several students. The education ministry said 65 education staff were injured, including 40 school principals. An investigation is under way after a 14-year-old boy in Val d’Oise suffered serious injuries to his mouth and jaw after police allegedly beat him and fired a form of rubber-bullet launcher. 

The government has accused the radical left La France Insoumise (LFI) party of encouraging the protests, with several LFI MPs and mayors, including Bally Bagayoko, the LFI mayor of the Paris suburb of Saint-Denis, cheered at demonstrations. 

 

The party’s candidate for the 2027 presidential election, Jean-Luc Mélenchon, insisted on Thursday that LFI backed “non-violent methods of struggle” and added that his “greatest worry is an unbearable level of police violence against these young people”. 

I can’t help concluding that we had the EU dream ticket; full membership and no Euro. We might not be so lucky if we try to realign with Europe! 

 

“These stones I throw, oh, these French kisses
Are the only way I’ve found” 

 

Today, I am considering the situation in France which, as they represent the Eurozone’s second-largest economy, makes the situation much worse than the first crisis in 2009-12.

Someone is going to need a very large bazooka!

France being France, they are rioting. This time it is the kids, whether this becomes  more general only time will tell.

Back home, it’s the Tory conference, which should provide some laugh-along moments. I am looking forward to Chris Philp especially, I just love his self-righteous indignation as he puffs himself up into a stupor!

Lyrically, I avoided French pop music, its too awful! There is, of course Jane Birkin and Serge Gainsborough’s “Je t’aime moi non plus,” but it doesn’t have what you might describe as lyrics!

Instead, we start with The Libertines’ “Time for Heroes”, inspired by the London May Day Riots of 2000, which frontman Pete Doherty attended. We end with The Stone Roses “Bye Bye Badman”, inspired by the 1968 riots in Paris.

Off to burn down my old school

Philip

 

@coldwarsteve

Philip Gilbert is a city-based corporate financier, and former investment banker.

Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s

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