Skip to content
Subscriber Only
Opinion
Marcus Ashworth and Elisa Martinuzzi

Europe Is in Danger of Another Sovereign Debt Doom Loop

ECB stimulus will encourage banks to hold more national bonds. This is potentially dangerous for the euro zone, as we saw in 2012.

A ride to oblivion. 

A ride to oblivion. 

Photographer: PATRICK HERTZOG/AFP

The European Union has been relaxing its rule book for banks — painstakingly built up in the decade or so since the financial crisis — as it tries to manage the impact of coronavirus. Unfortunately, the move might create big problems if economic activity fails to recover.

That’s because the regulations are being eased just as the European Central Bank is about to inject a huge amount of liquidity into the euro-zone monetary system. This will lead almost certainly to commercial lenders acquiring more sovereign debt through what are known as “carry trades” — where they borrow cheaply from the ECB and seek to make a safe profit by buying investment-grade bonds that yield more than their borrowing cost.