In fact, from 2010 onwards, several euro area countries have experienced a severe sovereign debt crisis. The driving forces of this evolution varied across countries. Some countries had already built up weak fiscal positions before the crisis, which emerged as a major vulnerability in the downturn. Others were overburdened by the fiscal costs of domestic banking crises.
But irrespective of its origins, in all cases an adverse feedback loop between bank and government balance sheets emerged, which then spilled over national borders. This adverse sovereign-bank nexus was nurtured by the large holdings of sovereign debt on bank balance sheets. When market scrutiny of public finances and investors’ risk aversion suddenly increased, sovereign yields started rising.