October 13, 2013
Europe’s financial institutions are more exposed to their domestic government bonds than at any time since the eurozone crisis started, reigniting concerns that the fates of sovereign states and their banks are too closely intertwined.
Despite official pledges by eurozone authorities to break the “sovereign-bank nexus”, government bonds accounted for more than a 10th of Italian banks’ total assets at the end of August, the last month for which data are available. That is up from 6.8 per cent at the beginning of 2012, according to data from the European Central Bank.
In Spain the proportion has risen to 9.5 per cent, up from 6.3 per cent over the same period, and in Portugal it has increased to 7.6 per cent from 4.6 per cent.
By far the majority of the increases – which occurred steadily month-on-month – are in holdings of bonds issued by banks’ own governments.
Analysts – including those at the ECB – warn that this could once again expose banks and governments to a spiral of shocks, for example, a credit rating downgrade.