Italian, Spanish banks load up more on government debt: ECB

Italian banks now hold more government debt than lenders in any other country in the euro zone, and Monday's data may add to concerns that banks there and in Spain are becoming ever more wedded to the fate of their own heavily indebted governments.

The data, the first for the period following the ECB's huge injection of three-year cash on February 29, showed Italian banks increased their holdings of securities issued by euro zone governments by a record 23.7 billion euros, taking their total holdings to 323.9 billion euros.

Spanish banks boosted their holdings of securities issued by euro zone governments by a hefty 20.1 billion euros. While the rise was smaller than January's record 23 billion, it left total sovereign holdings at a record 263.3 billion euros.

"This confirms that most of the buying that pushed down yields in these two countries was done by the domestic financial sector," Unicredit economist Marco Valli said.

"However, as time goes by, the effect of the 3-year money will start to weaken ... the willingness to get further exposure is lowering."

Valli also said it was unlikely the ECB would rush back to bond markets via its bond-buying program because bond yields have not climbed high enough to spur the central bank to restart the program.

In the last four months, Spain's banks have bought a net of more than 80 billion euros worth of government paper, while Italian lenders have added almost 70 billion in the past three months.

Spanish 10-year bond yields have fallen back below 6 percent in recent days while Italian 10-year yields are hovering above 5.5 percent.

Separate ECB quarterly data on Monday showed that Spanish banks have added considerably to their holdings of their own country's bonds.

Government debt holdings fell drastically in Greece and Cyprus, however, after the Greek government and private holders of its debt agreed to a deal to write off most of the value of that paper.

As of the end of March, Greek banks held 24.4 billion euros worth of government bonds, down from 43.1 billion a month earlier. The value of Cypriot banks' holdings of government debt slid to 5.1 billion euros from 9.0 billion.

French and German banks increased their holdings of government debt, the data showed.

Portuguese banks added 0.5 billion euros to their holdings of government debt, taking them to an all-time high 31.7 billion euros.

Use of the ECB's cash - lent at an interest rate of 1.0 percent - to buy higher yielding government debt has become known as the "Sarkozy trade" after French President Nicolas Sarkozy urged banks to use the money for that purpose at the end of the last year.

(Reporting by Sakari Suoninen; Editing by Hugh Lawson)