Student riots engulf France as far-right presidential frontrunner Le Pen vows fiscal turnaround

Mass student riots are escalating across France, with the violent clashes leading to arson, severe injuries and thousands of arrests.

Protests erupted late last month in Paris, spreading into a nationwide movement that has seen students blockade schools and take to the streets to voice their discontent with teacher shortages, long days and dilapidated school buildings.

Hundreds of schools have remained shuttered across the country as the rallies drag on. Education Minister Edouard Geffray said Monday evening that 190 students had been injured in the protests, with a 15-year-old boy reportedly losing a hand in clashes with riot police in the northern city of Lens.

France's Justice Ministry said Monday that 5,060 people had been arrested since the protests started, 87% of whom are minors.

Although Geffray said in an interview last week that the movement was "legitimate at the outset," France's Interior Ministry said the unrest "no longer has anything to do with the legitimate expression of high-school students' demands."

Student body L'Union Étudiante said the protests would continue in various locations across France on Tuesday.

"Together, we demand resources for young people," the union said in a Sept. 29 statement, according to a Google Translation. "We call for continued mobilization and for everyone to join in all its forms: rallies, blockades, and the [upcoming] demonstration."

But the French government has little fiscal headroom to allocate funding to education. Prime Minister Sébastien Lecornu's administration is about to start tough budget negotiations against a backdrop of division and economic turmoil.

Finance Minister Roland Lescure told reporters on Thursday that the 2027 budget was targeting a fiscal adjustment worth 54 billion euros ($60.7 billion). Cuts are planned to come, in part, from freezing wages for public sector workers like teachers.

Previous budget deadlocks have toppled French governments in recent years. Lawmakers have 70 days to debate and amend the budget proposal submitted by Lecornu's government on Thursday — but previous governments have leaned on emergency laws to force budgets through after the politically fractured parliament failed to reach a consensus on fiscal policy.

Political instability linked to the division on spending and budget cuts has put pressure on French government bonds, known as OATs, which have also been weighed down this year by a global debt sell-off and concerns about the country's finances.

The benchmark French 10-year yield has risen 129 basis points this year, according to LSEG data. Bond yields and prices move in opposite directions.

The euro has also come under pressure, with the currency falling to a 17-month low against the U.S. dollar Monday.

Further political instability is also expected to develop when France holds its presidential election in the spring. Far-right candidate Marine Le Pen, currently projected as the frontrunner in polls, said in a speech on Tuesday that "if the French people do not opt ​​for a political break with the status quo, France is heading toward a de facto default."

She said her policies — including "the abolition of more than 120 ridiculous or unnecessary taxes," "corrections to unfair and ineffective measures within the current pension system," a cap on France's net contribution to EU budget to 5 billion euros and "combating the aggressive tax optimization strategies of multinational corporations" — would bring the overall deficit below the 3% threshold within 18 months and equal 140 billion euros in savings by 2032.

"This radical effort is a deliberate move to send a clear signal that the slide in public finances is over and that markets can once again view France as a reliable partner," she said.

France is subject to the EU's excessive deficit procedure, with the bloc recommending the country ends its excessive deficit by 2029 — but it has a long way to go.

EU treaties set reference values of 3% of GDP for government deficits and 60% for government debt. Last year, France's deficit reached 5.1% of GDP, while its debt-to-GDP ratio hit 119% by the end of June.

Ian Bremmer, president and founder of Eurasia Group, told CNBC on Monday that Le Pen was "the most popular leader right now in France."

"What she's been promising is if she becomes president she will take 120 billion euros out of the budget over the five years of her term," he said on "U.S. Markets Edition."

"The only problem is she refuses to raise any taxes, she refuses to touch any major social spending, which is over 50% of the French expenditure, and she's going to bring down the pension level. So obviously she's a magician, because there's no other place this money is going to come from... if she wants to win as president, and she also wants to have a credible budget, those two things do not align."

Investors trading French bonds "have figured this out," he said. "They're clearly punishing France, kind of the way they were punishing the Brits when they were saying utterly incredible things that don't work from a market perspective," Bremmer added.

This week has "brought some initial signs that the pressure on France was stabilizing, with a clear outperformance in French debt," Deutsche Bank analysts led by Jim Reid said in a Tuesday note.

A volatile trading session on Monday saw the OAT-bund spread — the gap in French borrowing costs above Germany's — widen by 10 basis points in the morning before finishing 4.3 basis points tighter.

European bond yields were widely lower on Tuesday. The German 10-year yield fell 5 basis points as the French 10-year yield tumbled 9 basis points.

The bond market moves have "finally brought some respite after last week's rout, when we saw some of the biggest spread widening in years," the Deutsche Bank analysts added.

Widening "spreads," the splintering in bond yield moves among euro area nations, in recent weeks has raised memories of the Sovereign Debt Crisis of the early 2010s and raised questions about whether the European Central Bank would deploy its Transmission Protection Instrument, an intervention meant only to be used to calm severely disorderly market moves.

In comments reported by Reuters, French Finance Minister Roland Lescure said Tuesday that the government "must do everything to avoid getting to that point." Lescure also said it was not a lack of confidence that was causing the OAT sell-off, but fewer buyers.

Ken Egan, director of sovereigns at ratings agency KBRA, said the sharp widening in OAT spreads in recent weeks — with France's 10-year yield now around 23 basis points above Italy's — reflected "both concern over the fiscal trajectory and a growing political uncertainty premium, with the market questioning how quickly a credible path to fiscal improvement can be delivered."

— CNBC's Charlotte Reed contributed to this report.