I agree with the Bank’s warning that if government bond prices fall there will be problems for some EU banks. The curious thing is why have the Bank and other EU financial regulators supported the idea that government bonds are very low risk? Why did they make them core assets for banks, if now they are so worried about them?
This generation of bank regulators, Central banks and pension fund advisers have kept telling us government bonds are low risk and should therefore be the pillars of our banks and pension funds. Now they tell us some governments may not pay all the interest or repay all the capital. Meanwhile, setting very low official interest rates and buying up government bonds themselves, central banks have created a bubble in government bonds that could be damaging and painful if deflated.
The Bank’s comments may prove all too accurate, but not helpful. The central banks and governments which have inflated the bond bubble and told us to rely on them have a duty now to get us out of the mess they have created.