European bank warns of debt contagion

A TOP European Central Bank official has warned against rising debt levels on the continent, where “contagion” from a struggling Italy “remains a possibility.”

“In Europe we observe reemerging debt sustainability concerns, both in the public and private sector,” ECB VicePresident Luis de Guindos said in a Frankfurt speech.

With debts of 130 percent of annual economic output and a budget showdown with Brussels, “Italy is the most prominent case,” he added.

Investors fear the impact of weak national finances in Rome on the country’s banks, which hold large amounts of sovereign debt.

“Although contagion (from Italy to other countries) has been limited so far, it remains a possibility,” de Guindos warned. The ECB deputy’s warning matches concerns from the International Monetary Fund, which warned last week that interest rates on Italian government debt were at their highest level in four years.

Rome said it would not substantially revise its budget proposal for 2019 after it was asked to redo its homework by the European Commission.

Beyond Italy, de Guindos highlighted risks stemming from financial companies other than banks. Investment funds in the eurozone were managing 12 trillion euros (US$13.5 trillion) of assets by the end of 2017 — about 42 percent the size of banks’ assets.

The non-bank sector “may harbour leverage and liquidity risks that could amplify any potential shock from a reassessment of risks in financial markets,” de Guindos said.