LONDON: Europe could be facing a new sovereign-bank “doom loop” if a coronavirus crisis surge in government bond buying by banks in those same countries persists, rating agency S&P Global has warned.
A report on Monday by S&P said the European sovereign-bank ‘nexus’ — where banks buy bonds issued by the countries they are based in — has deepened by 210 billion euros ($247.76 billion) since start of the pandemic.
“Despite European governments’ efforts to increase risk sharing of the fiscal cost of the pandemic, we have seen few signs of this on the part of European banks,” S&P said.
“In contrast, they have concentrated more risk to their home country by buying more home country sovereign debt, especially in countries with the highest share, increasing the risks of a new doom loop if this trend persists.”
The share of ‘home’ sovereign debt that domestic banks hold varies greatly from country to country in Europe, S&P added.
In countries like Germany and France, it is typically about 5% and 10% of total private-sector lending. For many other economies, like Spain and Portugal, the ratio is closer to 20%, whilst in some central or eastern European countries the ratio is close to 50%, the ratings agency said.
The ‘doom loop’ was at the heart of the euro zone debt crisis when banks had huge holdings of their own governments’ debt.
($1 = 0.8476 euros)
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