The reason for the initial decline in 2006 in the share of government bond holdings was portfolio reallocation to corporate bonds and probably to international assets as well. The decline later on during the crisis was most likely due to an increased propensity of banks to hold domestic government bonds.
This is problematic, because it reflects an increased risk link between the sovereign and the domestic banking system. We also see that European investment funds held less European debt as the debt crisis intensified. The renationalisation of government bond holdings and, more generally, of safe financial assets is also reflected in the Eurosystem collateral that is posted by the Eurosystem’s counterparties.