November 26, 2018 / 10:16 AM / 23 days ago

Italian borrowing cost rise is unsustainable: ECB's Praet

FILE PHOTO: European Central Bank (ECB) executive board member Peter Praet attends the ECB and Its Watchers conference in Frankfurt, Germany, March 14, 2018. REUTERS/Ralph Orlowski

FRANKFURT (Reuters) - Italy could lose more than it gained from higher spending due to higher borrowing costs, the rise in which is unsustainable, European Central Bank chief economist Peter Praet said on Monday.

Italy is locked in conflict with Brussels over its plans to spend more next year than allowed under European Union rules, raising the prospect of a drawn out battle and sanctions for one of the bloc’s biggest member states.

“We estimate that... the so called loosening of fiscal policy will be at least neutralized by tighter conditions and perhaps more than neutralized,” Praet told a conference in Frankfurt.

Praet, an ECB board member, warned that such a rise in borrowing costs has an impact on the broader economy from banks to investment, so it was unsustainable, especially given that Italian economy is barely growing.

“This is a situation which is unsustainable, this tightening, so something will have to give,” Praet said. “The increase of spread that you have now in Italy for the sustainability of the economy and also if you look at the impact on banks and insurance companies, it’s not negligible.”

While the ECB makes policy for the whole of the euro zone, not for a single member, Praet said that the ECB will have to look at how the rise in Italian borrowing costs would impact the broader economy.

Still, for now, any spillover was negligible, he argued.

Reporting by Balazs Koranyi; Editing by Toby Chopra

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