May 24, 2018 / 8:01 AM / in 3 months

Profligate euro zone governments may face market's ire, ECB warns

FRANKFURT (Reuters) - Indebted euro zone governments that loosen the purse strings risk falling out of favor with investors, particularly if economic growth slows, the European Central Bank said in a report on Thursday.

The warning came as a new, anti-establishment government was close to taking office in Italy on pledges to cut taxes and jack up spending.

“A deteriorating growth environment or a loosening of the fiscal stance in high-debt countries could impact the fiscal outlook and, by extension, market sentiment towards some euro area sovereign issuers,” the ECB said in a statement accompanying its Financial Stability Review.

The ECB listed Belgium, France, Italy and Portugal as being at risk of breaking European Union budget rules and said that governments were in general too reliant on the economic environment remaining favorable.

Italy’s 10-year bond yield hit a 14-month high earlier this week, pushed up by growing political risks, although it was falling on Thursday after reassuring comments by Italy’s Prime Minister-designate Giuseppe Conte.

Editing by Gareth Jones

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