France has joined the ranks of the Eurozone’s most vulnerable borrowers, according to major investors, as political turmoil undermines efforts to tackle the country’s surging debt.

On Monday, French Prime Minister François Bayrou lost a crucial confidence vote on his deficit-reduction plans, collapsing his government and deepening a crisis that has already driven Paris’s borrowing costs to their highest levels since the Eurozone debt crisis.

At 3.49%, the yield on France’s 10-year bonds now exceeds that of Greece (3.37%) and is nearly equal to Italy’s (3.52%). As the Financial Times noted, the comparison places France alongside countries long considered risky by global investors.

“France is the new periphery,” said Kevin Thozet, a member of the investment committee at Carmignac, the French asset management firm.

France’s Rising Risk Premium

The extra yield investors demand on French 10-year bonds compared with German Bunds—a benchmark for borrowing costs—rose again above 0.8 percentage points on Tuesday, reflecting prolonged concerns over France’s economic outlook.

This risk premium is becoming “the new normal,” Thozet added. “Europe is moving at different speeds… France is in the slow lane, while Germany and southern Europe are accelerating.”

Bayrou’s departure increases pressure on President Emmanuel Macron to break the parliamentary deadlock in order to contain market unrest and prevent social upheaval. The Élysée Palace has announced it will appoint a new prime minister in the coming days, though the choice will not be straightforward.

Budget Plans in Limbo

Bayrou’s proposals—including the unpopular idea of scrapping two national holidays—aimed to bring France’s deficit down to 4.6% of GDP next year from 5.4% by the end of 2025. With his ouster, these plans will be shelved, leaving his successor to draft a new fiscal package for 2026. That package will likely be watered down in hopes of persuading opposition lawmakers to abstain and allow it to pass.

France’s debt-to-GDP ratio climbed to 113% last year, up from 101% in 2017 when Macron took office, and is expected to reach 118% by 2026, according to Eurostat. Rating agency Moody’s downgraded France in December, while S&P Global and Fitch maintain a negative outlook. Fitch is set to release its latest assessment on Friday, and a downgrade would push France’s rating to A+, the lowest among its peers and just seven notches above junk status.

Citi’s Aman Bansal, senior European rates strategist, warned that the failed confidence vote raises the risk of another downgrade.

Market Anxiety and an Uncertain Outlook

Fund managers argue that the fragmented parliament makes it nearly impossible to reach consensus on a new budget, meaning political gridlock could last until the 2027 presidential elections.

“France will be a problem child for bond markets over the next 18 months,” said David Zahn, head of European fixed income at Franklin Templeton, predicting “continued volatility” in French debt.

Maya Bhandari, head of multi-asset investments for EMEA at Neuberger Berman, echoed the concern: “Fiscal slippage seems to be the message in any political scenario. It’s hard to see a positive outcome.”

During the Eurozone debt crisis more than a decade ago, investors divided member states into safe “core” borrowers and risky “periphery” ones, with soaring yields forcing bailouts and ECB interventions.

France, traditionally part of the Eurozone’s core, is increasingly seen as only a “semi-core” borrower. This year’s sharp rise in debt among peripheral countries has further shifted investor perceptions of French risk, even though Paris’s borrowing costs remain well below crisis-era peaks.

“What we’re seeing is a slow drift of France into the periphery, unless fiscal policy adjusts soon,” said Tomasz Wieladek, chief European macro strategist at T Rowe Price.

Protests and Market Impact

Mass protests and strikes are planned across France on Wednesday in response to proposed spending cuts and growing opposition to Macron. Analysts warn that social unrest could further drive up bond yields.

French equities have also lagged this year while much of Europe has enjoyed a stock market rally.

“The lack of clarity on France’s direction and the worsening fiscal outlook mean the risk premium on French bonds and domestic equities is unlikely to shrink anytime soon,” said Emmanuel Cau, head of European equity strategy at Barclays.