But when markets do not work properly, because of the high level of uncertainty, because there is contagion or a general fear of systemic risk, market participants are no longer able to properly assess the risks and distinguish between them.
Expected difficulties, even temporary ones, in meeting a borrower’s (sovereign’s) financing needs can cause expectations of a liquidity crisis and then create a perceived risk which may be reflected in the uncertainty about the price at which to sell a particular security, notably government bonds.