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Italy’s borrowing costs rise as spotlight turns to EU meeting

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Italy's borrowing costs rise as spotlight turns to EU meeting

* Euro zone peripheral government bonds produce http://tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON (Reuters) – Italy's borrowing costs rose on Monday, returning to a month-high highs last week, reflecting discomfort before the European Union summit later this week on how to deal with the economic consequences of the coronavirus crisis .

Pressure to sell Italian government bonds returned last week, undoing some of the benefits of the massive European Central Bank bond buying scheme, after eurozone politicians failed to agree to the issue of common debt as a way of deal with the crisis.

Italian Prime Minister Guiseppe Conte used an interview with German Sueddeutsche Zeitung on Monday to repeat calls for the EU to issue common eurozone bonds to demonstrate the bloc's solidarity in the face of a pandemic that is likely to trigger the worst recession in years.

Europe will need at least another € 500 billion from EU institutions to finance its economic recovery, in addition to the agreed half-trillion package, said the head of the eurozone rescue fund, Klaus Regling.

"Thursday is the key day of this week, with EU leaders participating in a potentially big event for the future of Europe, while discussing how close the region can get to a joint broadcast in the near future," said Jim Reid, strategist at Deutsche Bank.

"Expect creative ambiguity to rule as it normally does on the continent. However, would you expect more explicit details to be described about how Europe will help Italy. Will that be enough to keep Italian spreads (and domestic policy) in check?"

Early Monday, yields on the Italian curve were 4 to 7 basis points higher on the day.

Yield on Italy's 10-year bonds rose 7 bps to 1.89% – dropping to the one-month highs reached last week. The yield gap in relation to the best-rated German Bundes was 230 bp, about 10 bp more than Friday's closing levels. The Italian bond market faces another test at the end of the week, when S&P Global looks at Italy's BBB rating with a negative outlook.

The story continues

The downgrade of Fitch's ratings from the Portuguese rating outlook to stable from positive on Friday highlights the impact of the pandemic on state finances, the economy and credit quality.

Yields on Portuguese and Spanish securities over 10 years rose by about 2 bps each.

Germany's 10-year benchmark yield has changed little by around -0.47%.

Also in focus was a renewed drop in oil prices, with U.S. oil falling more than 20% to levels never seen since 1999.

(Reporting by Dhara Ranasinghe, Larry King edition)

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