In its semiannual Financial Stability Review, the European Central Bank said challenges to financial stability are on the rise amid downside risks to the economic outlook.
Volatility in financial markets has risen due to uncertainty in the global economic growth outlook, the central bank said May 29. "Should downside risks to growth materialize, financing costs for vulnerable sovereigns are likely to increase which may unearth debt sustainability concerns," the ECB said.
The bank said some countries could face "rollover risks" if sovereign risk were reassessed by market participants, in addition to high debt and fiscal deficits.
The ECB also said banks' profitability will remain low in the eurozone, and as per ECB's estimates, banks would likely generate a return on equity of around 6% over the next two to three years, with a large share of lenders unable to meet the 8%-10% expected returns required by investors.
The European Commission is reportedly preparing a letter to the Italian government, warning it of excessive debt levels and seeking explanations regarding Rome's finances, a move that could revive Italy's tussle with Brussels over debt rules.
The European Commission was said to be weighing disciplinary measures against Italy over its debt and deficit measures in June that could eventually cost up to €3.5 billion over the country's failure to reduce debt levels.