French markets slide after worst unrest in years

Adds opening stock moves, updates headline, changes media identifier

By Alun John

LONDON, Oct 19 (Reuters) - French bonds and stocks slid on Monday, performing worse than other European markets, while the euro also fell, after widespread protests across France underscored difficulties the government faces in reducing its large deficit.

Already contending with weak growth and ballooning debt, the euro zone's second-biggest economy witnessed some of its worst unrest in years over the weekend. Thousands of people were arrested and shops were looted or damaged during protests over high prices and declining public services.

Political jostling ahead of next year's presidential election could also complicate matters, with ramifications for markets.

The unrest "won't make it easy for the international community to be totally comfortable buying OATs (French bonds), so the modest recovery in French spreads over the last week or so will be tested today", Jim Reid, global head of macro research at Deutsche Bank, said in a note.

"With France already facing a difficult fiscal backdrop and the 2027 election approaching, the weekend adds another layer of political risk for markets," he said.

A slide in bond prices pushed France's 10-year yield up 8 basis points to 4.86% FR10YT=RR, while Germany's 10-year yield, the benchmark for the euro zone, was flat at 3.41%. DE10YT=RR

The gap between them, at 145 basis points, is the highest in two weeks, though has eased from the close to 160 bps hit in early October. Also in early October, France's 10-year yield hit 4.99%, its highest since 2002.

The recent moves in French debt also illustrate how hedge funds' growing role is making the market more vulnerable — a risk regulators are watching closely.

STOCKS AND EURO STRUGGLE

French stocks were also the worst performing in Europe. The blue-chip CAC 40 index was down 1.2%, compared to a 0.6% drop in broad European stocks .STOXX, while shares in two of France's biggest lenders, BNP Paribas BNPP.PA and Societe Generale SOGN.PA, each fell over 2%.

One particular focus for traders is whether the jump in French yields spills over to other heavily indebted parts of the euro zone. They see Italy as the first to watch. Italy's 10-year yield was up 4 bps on Monday at 4.52%. IT10YT=RR

Ratings agency Moody's will review France's credit rating on Friday, which could result in a downgrade that, in turn, may add some pressure on the country's bonds.

"As Moody's is merely catching up with other rating agencies, however, headwinds for spreads from the downgrade are likely to remain limited," analysts at Commerzbank said.

Developments in France also weighed on the euro, which was down 0.2% to 0.3% on the dollar, pound and yen on Monday. EUR=, EURGBP=, EURJPY=

(Reporting by Amanda Cooper and Alun John
Editing by Dhara Ranasinghe, David Goodman and Joe Bavier)