* EU finance ministers disagree over fiscal aid package
* Italian yields rise, gap with German yields grows
* Other peripheral yields little moved, ECB measures may help
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds latest statements, updates prices)
LONDON, April 8 (Reuters) - Italian government bond yields rose on Wednesday after European Union finance ministers failed to agree a rescue package to help economies recover from the impact of the coronavirus outbreak.
Diplomatic sources and officials said a feud between Italy and the Netherlands over what conditions should be attached to euro zone credit for governments fighting the pandemic was blocking progress on half a trillion euros worth of aid.
Heavily indebted Italy, one of the countries hardest hit by the pandemic, has been lobbying for more economic support -- including some form of debt mutualisation.
The European Central Bank, which has showered the region with more cheap cash to aid a recovery and scaled up its bond-buying scheme to keep borrowing costs low, has said EU governments must ramp up their fiscal stimulus. It has told euro zone finance ministers that measures worth up to 1.5 trillion euros could be needed, officials told Reuters.
“There were expectations that at least they (EU ministers) would come up with a cheap compromise,” Jan von Gerich, a fixed income strategist at Nordea, said.
“What we know from the leaks is that they haven’t even got that agreement. It becomes very challenging for countries like Italy. The ECB doesn’t want to take all the risks. They don’t want to hold half of Italy’s debt when the debt is unsustainable.”
Germany’s finance minister said he hoped ministers would reach an agreement before Easter, with ministers due to meet again on Thursday. Olaf Scholz said there were three proposals of a combined volume of 500 billion euros
His French counterpart said EU states need to be able to access credit from the European Stability Mechanism to tackle the coronavirus without strings attached to the funds.
Italy’s 10-year bond yield rose as much as 20 basis points, hitting its highest since March 19 at 1.748% before slipping back. It was last up 5 bps at 1.65%.
The 2-year yield was last up 12 bps at 0.69%.
The gap between benchmark 10-year German and Italian bond yields, a gauge of the risks investors attach to lending to Italy, expanded to more than 200 basis points, at one point hitting its widest since March 20.
The cost of insuring against southern European sovereign debt also rose, with the five-year credit default swap for Italy up 15 bps, according to IHS Markit. Spanish CDS rose 7 bps, and Portugal’s by 5 bps.
Nordea’s von Gerich said the ECB, at least privately, would be happy for Italian yields to rise as long as the moves were not too dramatic, in order to send a message to EU ministers that they needed to reach an agreement on fiscal support.
Italian 10-year bond yields rocketed past 3% last month but ECB intervention has brought them back down.
Other southern European bond yields rose on Wednesday too but the moves were more modest - analysts say that given Italy’s push to get the EU to agree to debt mutualisation, it had the most to lose from the failure to reach agreement.
Spanish 10-year yields were up 3 basis points, while Portugal’s were up 5 basis points in late trade. . Greek 10-year yields were unchanged at 1.83%.
UniCredit analysts noted that new ECB measures announced on Tuesday make Greek government bonds eligible as collateral in Eurosystem credit operations.
Germany’s 10-year yield was unchanged at -0.32%. ($1 = 0.9207 euros)
Reporting by Tommy Reggiori Wilkes, additional reporting by Yoruk Bahceli; editing by Dhara Ranasinghe, Alison Williams and Emelia Sithole-Matarise
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