EU Officials Spooked by Euro-Area Borrowing Plans as Yields Jump

European Union policymakers are growing increasingly concerned about government demands for budget leniency as the bond market tumbles, according to an EU official.

Countries are not grasping the seriousness of the situation, the official said, requesting anonymity to discuss the sensitive situation. They keep asking Brussels to relax EU fiscal constraints, but the market is seeking predictability, the official added.

If EU countries respect their spending targets, ongoing interest rate increases — meant to tame Iran war-fueled inflation — will remain manageable, the official added. A second EU official said euro-area governments are likely to face considerable pressure from financial markets in the coming months.

Requests for budget leeway have arrived as governments battle Europe’s high energy prices, with brent crude now hovering around $100 a barrel due to the Middle East conflict. Italy and Greece both recently sought additional flexibility from the European Commission, the EU’s executive arm, which polices countries’ deficit and debt levels.

But EU executive’s blessing is no guarantee that investors will be willing to finance euro-area governments at a sustainable level, the first EU official said. The bloc did grant some exemptions to countries to help fund a rearmament drive and limited energy measures.

A spokesperson for the commission did not immediately reply to a request for comment.

In recent days, Europe’s economic picture has worsened, driven by a bond selloff in France. On Friday, investors were charging the biggest yield premium to hold French bonds over safer German debt since the continent’s debt crisis 15 years ago.

Read More: French Bond Risk Hits Euro-Crisis Levels as Fiscal Concerns Grow

French stress is now spilling over into peripheral markets.

Italy’s spread against German bonds is set for its biggest weekly widening since March 2020, data compiled by Bloomberg show. Spain has also seen its gap against German bonds grow. Although both spreads remain below crisis-era levels, the pace of widening this week has raised contagion concerns.

France has questioned relaxing budget rules for the energy crisis and is making an effort to keep spending under control. Earlier this week, the government announced a budget for next year that included a €54 billion ($61.2 billion) plan to curb spending and pare the fiscal shortfall to 5% of economic output in 2027 from 5.4% this year.

Read More: France Lays Out Budget in Latest Test of Investor Nerves

Warnings against additional borrowing increases could come up when EU finance ministers gather next week in Luxembourg, where energy prices are expected to be discussed.

France’s Bond Crisis Deepens as Investors Head for the ExitGreece Calls for EU Fiscal Flexibility to Address Energy CostsMeloni Says She’ll Ask EU for Extra Budget Flexibility on Energy