The Eurozone’s financial regulatory framework, combined with the ECB’s monetary policy, has created an environment in which holding sovereign bonds is the optimal outcome for many of the area’s banks.
Source: Natixis
This has two major consequences:
1. Government bonds crowd out private sector credit, limiting loan growth in a number of countries.
2. Banks are becoming more intertwined with their central governments – something that was part of the cause of the debt crisis. Governments depend on banks for cheap funding and banks depend on their governments for support (bailout) in case of a liquidity crunch.
