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Mark Gilbert

It's Official: Government Bonds Can Damage Your Wealth

Regulators need to abandon the fantasy that sovereign debt is risk-free.
These charts should carry a wealth warning.

These charts should carry a wealth warning.

Photographer: Chris Ratcliffe/Bloomberg

For months, the European Union has been wrestling with the tricky issue of how much money banks should set aside to guard against losses on government bonds. The current rules maintain the myth that sovereign debt is zero risk-weighted; the system assumes that you'll always get repaid everything you've lent to a government, which flies in the face of centuries of sovereign defaults as well as the kerfuffle that's still not completely resolved in Greece. Now, one country has broken ranks.

Sweden's Financial Supervisory Authority has ordered its banks to come up with models that better reflect the reality that, yes, you can lose money on government debt. It also wants an acknowledgment that lending to one government -- Greece, for example -- might just possibly be riskier than lending to, say, Germany. No matter how obvious that might be to folk in the real world, the universe of banking regulation and capital standards can often remain trapped in a delusional Alice in Wonderland state long after logic has reasserted itself on market prices.