French Bonds Keep Climbing as Unrest Mounts. The Benchmark Note Passed 5% For The First Time Since 2002.

French bonds kept climbing on Wednesday as economic and social tensions keep plaguing the country.

The benchmark 10-year OAT topped 5% for the first time since 2002 during the session before pairing some gains.

France's economic situation continues to dominate headlines amid heightened protests that have turned violent, with riots and clashes on the streets.

Lawmakers are negotiating the 2027 fiscal budget in the meantime, with authorities under pressure to reduce spending. In fact, Finance Minister Roland Lescure said the government will implement cuts even if lawmakers don't approve.

However, Nobel Prize winner Paul Krugman recently said the country is in a "fiscally unsustainable path" and may have become "too big to save."

In a new assessment published in his Substack, Krugman said the "spike in interest rates on French government bonds over the past month has been especially large" as the financial markets began to treat the country as the "economic sick man of the Western world."

France's deficit is expected to clock in at 5.1% of its GDP, same as 2025, while 2027's is set to increase to 5.7%.

France is also under the European Union's excessive deficit procedure. The country has committed to a fiscal adjustment path through 2029 aimed at bringing its deficit below the EU's 3% of GDP threshold, according to the European Commission.

As markets consider the possibility that France could default on its national debt, Krugman also noted that even though its interest rates are lower than the U.S.'s, they have risen much faster than other European countries and are now above Italy's.

A scenario in which France needs to be bailed out would be "extremely expensive," the economist added. "As the second largest economy in the euro zone, France may have crossed the line from too big to fail to too big to save. In short, it's all too easy to describe a really ugly scenario for a French crisis that would be extremely divisive within Europe."

Krugman is not the only one calling on Paris to address its fiscal situation. International Monetary Fund (IMF) head Kristalina Georgieva did so this month, saying the country should "get its house in order."

Asked if the situation could resemble that of the euro zone sovereign debt crisis that took place earlier this century, she said no, noting that the "French economy is growing" and that Europe has a "much more mature system."

"We have the strength of the European Central Bank. We have other instruments that Europe has developed to protect against financial stability risks," she added.

Protests keep escalating in the meantime, and authorities have decided to deploy the military to the streets.

The Sentinelle force, created in 2015 after a wave of terrorist attacks in Paris, will be used "mainly on static security missions."

French Interior Minister Laurent Nuñez told lawmakers that the deployment can free up police officers and gendarmes to carry out law enforcement operations.