"Iranian shock" triggers concerns over fiscal deterioration, eurozone borrowing costs soar to multi-year highs.

The situation in Iran has pushed up energy prices and inflation expectations have risen accordingly. Eurozone government bonds have recorded one of the most serious monthly sell-offs in nearly a decade. The borrowing costs of countries such as Italy, France, and Spain have been pushed to multi-year highs, and concerns about governments being forced to increase fiscal spending to protect consumers have intensified. The yield on Italy's 10-year government bonds rose to 4.14% this month, reaching a new high since mid-2024, with an increase of about 0.8 percentage points for the month. The sell-off is comparable to the one during the previous energy crisis in 2022. The yield on French 10-year bonds touched nearly 3.9% in intraday trading, the highest since 2009, while Spain's yield approached 3.7%, the first time since the end of 2023. The impact of Iran has pushed up oil and gas prices, leading to increased inflation expectations. The European Central Bank may be forced to raise interest rates three times this year. At the same time, fiscal positions of various countries have deteriorated due to energy subsidy measures, leading to an increase in bond market sell-offs and borrowing costs. The shadow of inflation returns, central banks remain cautious According to the Financial Times, Isabel Schnabel, a member of the European Central Bank's executive board, stated in a speech on Friday that "the specter of inflation has returned" and that this shift has occurred at a speed that has surpassed the expectations of "many people." However, she also stated that the ECB does not need to "rush into action" and still has time to "observe the data" and wait for further evidence of the second-round inflation effects. Bert Colijn, economist at ING, pointed out that part of the current rise in yields reflects investors unwinding positions that had bet on narrowing yield spreads, especially focused on Italy. He stated that there is currently no significant concern in the market about sovereign debt risks in the eurozone, but warned that "if the situation continues to deteriorate, the cost of fiscal measures could further escalate, and this risk could still emerge." Tomasz Wieladek, Chief European Macro Strategist at T Rowe Price, stated, "Investors are realizing that we are entering a situation where low growth and high inflation coexist, along with more fiscal stimulus and government spending expansion." Differences in response measures by countries In response to the energy price shock, eurozone countries have varying degrees of fiscal measures, but face limited space overall. The Spanish parliament approved a 5 billion tax cut plan on Thursday, lowering the value-added tax rate on electricity, natural gas, and fuel from 21% to 10%. The plan was proposed by left-wing Prime Minister Pedro Snchez. Italy, on the other hand, temporarily reduced the fuel consumption tax by 20%, costing around 4.17 billion, with the measure in place until April 7 for evaluation. Rome plans to offset the revenue loss by cutting spending in other areas, including healthcare. France has chosen to hold the line on fiscal measures and has not introduced large-scale energy subsidies. The Prime Minister cited the high fiscal deficit as a share of GDP reaching 5.1% by the end of 2025, stating that "there is no pot of savings to tap into." The government has only introduced targeted measures for industries heavily impacted by the crisis, such as agriculture and truck transport, costing around 70 million in April. Simone Tagliapietra, Senior Research Fellow at Bruegel, pointed out that the measures announced by countries such as Spain indicate that "we are talking about large sums of money." He warned, "European governments face fiscal constraints, with a lot of competing demands, especially for defense spending, and public budget space is very limited. I don't think there is the same fiscal space for large-scale action as there was in 2022 and 2023." Budget pressures intensify, current cushion space narrowing The previous energy crisis serves as a warning reference for the current situation. According to data from the Bruegel think tank, since the energy crisis erupted in September 2021, European countries (including the UK and Norway) have allocated and reserved a total of 651 billion to protect consumers from the impact of rising energy prices. The OECD pointed out this week that many measures taken during the previous crisis were "not sufficiently targeted, with significant fiscal costs," and warned that the measures taken this time to cushion the rise in energy prices will "further exacerbate the budget pressures faced by most governments." Jean-Franois Robin, Global Research Director at Natixis CIB, stated that investors are betting that public finances in the eurozone countries "will deteriorate," as countries are spending "a great deal of public funds" to absorb this shock. Spreads advantage reverses, threshold risks emerge The current bond sell-off has reversed the relative advantage of high-debt eurozone member countries over Germany. For example, Italy's 10-year government bond spread to German bunds was around 0.6 percentage points before the conflict broke out, and has now risen to close to 1 percentage point. Several investors emphasize that the current spread levels are still moderate in historical terms - Italy's spread has reached 3 percentage points during the pandemic. Konstantin Veit, portfolio manager at bond giant Pimco, stated, "The current widening of spreads does not negate the logic of long-term spread narrowing," and pointed out that it will take several years of high rates combined with low growth to truly raise questions about debt sustainability. However, some analysts point to key threshold risks: if the yield on German 10-year bonds (currently around 3.1%) further rises above 3.5%, borrowing costs for Italy and France could be pushed to around 5%. Wieladek of T Rowe Price warned that at that point, "debt sustainability will become uncertain." This article is compiled from "Wall Street View," by Li Jia, edited by Xu Wenqiang.