By Marta Vilar – MADRID (Econostream) – European Central Bank Vice President Boris Vujčić said Monday that rising sovereign bond yields could increasingly expose fiscally vulnerable euro area countries to market pressure, warning that governments would need to respond primarily through fiscal policy if the underlying problem was fiscal.

Speaking at a Central Bank of Ireland conference, Vujčić said sovereign bond yields had been rising gradually since before the summer, with the increase accelerating more recently, a development the ECB needed to monitor closely.

He noted that yields had been increasing globally, rather than only in Europe, but warned that countries with higher debt-to-GDP ratios and weaker fiscal positions could become particularly vulnerable as borrowing costs rose.

"At some point those that are fiscally more vulnerable [...] get exposed more and get picked by the markets more," he said.

"The answer to that obviously, as we say, is if the problem is fiscal, [there] has to be primarily the fiscal reaction," he added.

Vujčić also warned about potential financial stability risks arising from the interconnectedness of non-bank financial intermediaries (NBFIs) and the banking system.

He said a repricing of artificial intelligence-related assets or a further increase in bond yields could trigger losses in non-bank institutions' securities portfolios, potentially leading to forced asset sales and contagion spreading to banks.

For now, the ECB did not consider these risks particularly dangerous given the exposures observed, he said, but cautioned that their impact could increase rapidly.

"These things can be non-linear, as we know," Vujčić said. "So we have to clearly carefully watch also these exposures."