By Alice Gledhill and William Horobin For most of the euro’s history, investors took the view that France would muddle through its political and economic challenges and remain a relatively safe bet. That idea isn’t holding any more.

A selloff in global debt has fueled a rout that’s hitting harder and faster in France than anyone expected. Nerves are fraying about missed deficit targets, policy gridlock and presidential elections next year that could radically alter the country’s direction. The budget shortfall was supposed to narrow to 5% this year. Instead, it’s heading in the opposite direction.

Signs of a crisis are building as the government kicks off negotiations over fiscal plans that could trigger its collapse. The country’s 10-year yield has surged more than one percentage point since June, its worst quarterly performance since the birth of the single currency. Equities are underperforming, and Bank of America Corp.’s European fund manager survey showed France is the least preferred market for the next 12 months.

In its budget Thursday, the government unveiled unusually ambitious cuts to get the deficit to the goal it missed this year. The plan will be a tough sell in a fractured parliament that's repeatedly spooked investors by toppling prime ministers.

The longer-term political path is also unclear. In May, an electorate disillusioned by a decade of centrist rule under Emmanuel Macron will choose a new president. Recent polling has shown it may come down to a second-round runoff between the far-right front-runner Marine Le Pen and far-left candidate Jean-Luc Mélenchon.

If Paris can’t get to grips with the budget situation, the danger won’t be contained within French borders. Other countries could suffer through bond market contagion, fiscal rule erosion and weakened institutional leadership in a region already grappling with multiple challenges. The euro is at a 16-month low against the dollar and hedge funds are increasing bets against the currency.

“The risk perception on French debt is deteriorating,” Marie Jacot, chief executive at Edmond de Rothschild Asset Management France,said on Bloomberg TV this week. “The market is starting to punish France and its level of debt, which is not necessarily something it has done in the past.”The domestic issues are compounding external stresses from rising energy prices and expectations of more central bank interest rate hikes, fueling a growing unease among the French public.

Debt has shot up the list of concerns in surveys, bond markets are making front-page news and government officials are warning that the country’s interest bill now exceeds what it spends on defense or education.

In recent days, student protests over crumbling school buildings and overcrowding have led to clashes with police.

There’s no doubt France is in a parlous state. The debt ratio is near 120% of GDP, almost twice Germany’s, and some investors are going so far as to draw parallels with Greece, which was at the epicenter of the crisis that almost splintered the euro zone in the early part of the last decade.

Dozens of investors and market strategists interviewed by Bloomberg are increasingly convinced there is no easy fix. While the annual budget tussle was always expected to stress markets this fall, the worsening of the fiscal outlook has taken the challenge to another level.

At 4.9%, France’s 10-year yield is around the highest since 2002. The premium investors charge to hold that debt over the equivalent German bund has more than doubled since May, to 141 basis points.

“To reduce the spread between France and its main European partners, it’s a question of credibility, a question of confidence,” Finance Minister Roland Lescure said Thursday. “We are capable of doing it, it is possible.”Even if a centrist can squeeze through in the 2027 presidential contest, it’s likely they would struggle just as much as the political extremes to secure the majority in parliament needed to meaningfully tackle the debt problem.

Andrzej Szczepaniak, senior Europe economist at Nomura International Plc, expects more pain as that realization sinks in, pushing the French yield premium to as much as 200 basis points by the end of 2027.

“In France, political risk is fiscal risk,” Szczepaniak said. “The real problem that I think investors are underpricing is the likelihood of further fragmentation.”

According to Florence Barjou, chief investment officer at Credit Agricole Assurances in Paris, weak growth and political instability isn’t new, but it’s now at a level where France’s bond market is perceived as the “worst country in the euro zone.”Barjou said the country remains a core investment, but the insurer is diversifying to manage the uncertainty. It held about €61 billion ($69 billion) of French sovereign debt in the first half of the year.

It all looks like an ignominious ending for Macron and his pro-business agenda aimed at reviving the economy and luring foreign investment.

There are also broader repercussions, because France’s heft means its problems are Europe’s problems. That’s at a time when Germany has its own political stress and the bloc as a whole is dealing with energy vulnerabilities and a war on its doorstep.

“It's not good for Europe,” Societe Generale SA Chief Economist Michala Marcussen said. “The risk is that the political space to advance the European agenda will narrow — and France is absolutely key here.”Still, the worst of the budget bust-ups of the past two years may be avoided. Acknowledging the scale of the crisis, Le Pen has indicated she may refrain from trying to topple the government, a deviation from her party’s usually obstructive stance.

Having a budget in place is in Le Pen’s interest. It would be easier to make swift legislative changes should she win the election, rather than have to deal with an emergency situation.

The National Rally leader has said that if elected she would propose a referendum to create a golden rule on deficits. She plans to outline alternative fiscal proposals later this month, alongside a deficit reduction plan. So far she’s given little detail on her objective of €125 billion of cuts, while sticking to costly pledges including slashing tax on fuel.

“It has been a slow burn, and it’s not stopped burning recently,” said Peter Goves, head of developed market debt sovereign research of MFS Investment Management. “I don’t know what the tipping point is, but my assumption is that the next president will have to deal with it.”