November 24, 2018 / 2:33 PM / 20 days ago

Rising bond yields could hit Italian economy: ECB's Nouy

FILE PHOTO: European Central Bank's chief supervisor Daniele Nouy speaks during a banking conference in Lisbon, Portugal, May 17, 2016. REUTERS/Rafael Marchante

MILAN (Reuters) - Rising bond yields in Italy could eventually hurt the economy as banks could be discouraged from lending, European Central Bank supervisor Daniele Nouy told a newspaper on Saturday.

The yield spread between Italian and German bonds has spiked to 300 basis points in recent days from 130 basis points in mid-May due to a tug-of-war between Italy’s anti-establishment government and the European Commission over its budget plans.

Italian banks, which hold billions of euros worth of government debt, are suffering because the widening spread with the German bunds reduces the value of their bond holdings, increasing the risk of capital shortfalls.

“The higher (bond yield) spread is certainly not welcome,” Nouy told Italian daily Il Sole 24 Ore in an interview.

The rising bond spread risked jeopardizing the “positive results” Italian lenders achieved in cutting bad loans, the ECB supervisor said, adding this could impact their ability to lend money and in turn hurt the economy.

“It would be a real pity if the Italian banks, which have worked so hard to reduce their bad loans and improve their balance sheets, lose the benefits of their efforts,” she said.

Nouy, who will end her stint as the head of the ECB’s supervisory board at the end of this year, said that time was ripe to start setting up a European insurance scheme for deposits.

The European Commission has proposed a European deposit insurance scheme (EDIS) as part of the response to the 2008 financial crisis, but the scheme has yet to be adopted by the countries in the eurozone.

Reporting by Francesca Landini; Editing by Clelia Oziel

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