Politics May Have Helped Create Europe's Sovereign-Bank Loop of Doom

"Correlation does not imply causation, but it does waggle its eyebrows suggestively and gesture furtively while mouthing 'look over there,'" quipped the comic xkcd.

A new working paper by Filippo De Marco and Marco Macchiavelli is likely to raise many eyebrows as it makes the case that political suasion may have created the very thing that helped plunge the eurozone into crisis, using stress test data to argue that higher state ownership and the presence of politicians on bank boards are linked to lenders' penchant for snapping up domestic government debt.

The tendency of European banks to accumulate government bonds issued by their own countries on their balance sheets — banks' average 'home' exposure was a whopping 74 percent of total government debt holdings on the eve of the crisis in late 2010 — created the perfect path for sovereign stress to infect the financial system (and vice versa).