The economic crisis caused by the pandemic and the efforts to deal with its consequences have created new conditions for the economies and especially in the European banking sector.

European governments have issued bonds to deal with the economic impact of the pandemic, as a result, for the first time, the debt of the Eurozone has exceeded 100% of its GDP. Nevertheless, the cost of borrowing for European governments is low, thanks to the combination of the two bond-buying programs implemented by the ECB and the Recovery Fund. At the same time banks are responding to bond issuing on the one hand because governments encourage them to buy their bonds, in order to ensure adequacy of liquidity and on the other hand because sovereign debt is known as to be safe, without credit risk.

So, while after 2015 eurozone banks began reducing their exposure to government bonds, since last year the situation is reversed, as in order to address the economic impact of the pandemic, banks increased their holdings of government bonds. As a result, the exposure of the banking sector to government debt jumped within 12 months, reaching EUR 2.1 trillion in February, while the corresponding amount a year earlier was at EUR 140 billion.

or example, the exposure of Italian banks to Italian government bonds amounted to EUR 712 billion in August 2020, having increased by more than 9% compared to February of the same year. Sharp rise in debt holding have also French banks, with government debt rising to EUR 431 billion last September, expansion of more than 18% since February levels.

Concerns have been raised about the viability of the banking system but also about the effectiveness of the European Union’s planning and the tools that can be implemented for dealing such situations, as in contrast to other risks, that measures have been taken, the risk of the escalation of government debt in bank’s balance sheets has not been addressed yet. The increase of public debt due to the pandemic makes the need for reform and tackling the problem imperative. Under these circumstances, discussions have already begun on managing debt growth and crisis exit policies through new fiscal instruments and the modification of existing ones.