The ECB warns of a risk of contagion to Italy


FRANKFURT (Reuters) – The growing tensions on the Italian bond market could affect other indebted countries of the euro zone and cause an increase in disorderly borrowing costs, warned Thursday the european central Bank (ECB).

In its financial stability report, which lists a long list of risks, the ECB raises, among others, the high budget deficit of Italy, the eventual end of the growth cycle of the United States and signs of over-valorisation of the real estate market of the euro area.

“The fears over the sustainability of sovereign debt have resurfaced,” said the ECB. “The pressures on the financing costs of States, to which is added the failure of fiscal consolidation efforts, could bring the debt ratio on a path unsustainable in the most indebted countries”.

The draft budget for Italy to 2019, which foresees an increase of public spending against the rules of the european Union, has led to a surge of bond yields of the country, weakening an economy already facing high debt and a slowdown in economic activity.

“The increasing pressures on the market could be spread to other sovereign bond markets in the event of a strengthening of the stress in Italian”, said the ECB.

Then she felt for a long time that the price of the real estate market are not excessive, the central bank has also warned Thursday that there was now “weak signals” of an overstatement, with substantial price differences between the different countries of the euro area.

“The main factors that could lead to an increase in disorderly risk premiums are related to elements of both domestic and external,” wrote the ECB in its stability report.

“This includes the reactions of chaotic markets to political uncertainty in the euro zone, increased stress on emerging markets with indirect effects on the developed economies and an abrupt shift in the macroeconomic outlook and financial in the United States”.

The increase in the u.s. budget deficit could trigger turbulence in emerging markets, which have accumulated large dollar-denominated debt and face therefore to a credit risk “very high”, highlighted the ECB.

“A standardization of the faster than expected monetary policy of the United States and a significant appreciation of the dollar could cause a rapid rise and widespread in the risk premiums on the financial assets of the emerging markets.”

(Balazs Koranyi, Blandine Hénault for the French service, edited by Marc Angrand)

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