Great Graphic: Bank Holdings of Sovereign Debt

This Great Graphic comes the the IMF's latest World Economic Outlook. For a selected group of countries, it shows the bank holdings of government debt in Q1 2006 (pre-crisis) and Q3 2012 as a percentage of overall bank assets.

There are several countries included where sovereign holdings in Q3 12 are a smaller part of bank assets than in Q1 2006.  Greece stands out, but that is a consequence of the restructuring of the government's debt (that was in private hands, though ABN AMRO, in the Netherlands is a notable exception).

We suspect that in several core euro zone members, like Germany, France and Belgium, the reduction is a function of reducing peripheral exposures faster than domestic sovereign debt was accumulated.  Similarly, the increase in Portugal, Spain Italy's ratios are function of the use of the LTROs to purchase domestic sovereign debt.

Europe still does not appear to have severed the link between sovereigns and banks, but the causal connection runs in both directions.  Sometime a weak sovereign can aggravate the bank challenges.  If, for example, the political situation cannot be resolved in Italy and the sovereign yields rise precipitously, Italian banks will suffer.  Similarly, the banking woes in Cyprus and Slovenia exacerbate the sovereign challenges.

Elsewhere, the increase sovereign holdings of Australian and New Zealand banks seems surprising.  There had seemed to be strong international interest, especially for Australian paper, given the relatively high yields and healthy banking system.

US banks have also increased Treasury holdings on their balance sheets, which is partly a function of strengthening their balance sheets and the slower increase in lending to the private sector.   Japanese banks had the highest percentage of sovereign bonds on their balance sheets in 2006 and increased it further in the subsequent period.

Private sector lending in Japan has risen for nearly 18 months now, mostly for reconstruction efforts, though there has been some lending related to foreign direct investment as well.  However, lending to the private sector is still relatively slow.   It will be interesting to see if Japanese corporations try to fill the gap, created by the BOJ's plans to purchase 70% of the new JGBs this year and next, by issuing more corporate bonds.

Great Graphic: Bank Holdings of Sovereign Debt Great Graphic:  Bank Holdings of Sovereign Debt Reviewed by Marc Chandler on April 14, 2013 Rating: 5
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