Sovereigns likewise stand to benefit in the short run since they can raise funding relatively easily thanks to the artificially inflated demand for government bonds – yet at the same time this lessens the pressure on them to consolidate government finances and to reduce their debt to sensible levels.
However, the crisis made it more than clear that even euro-area countries’ government bonds can be exposed to risk. This is why, in my view, capital requirements need to be extended to cover banks’ on-balance-sheet lending to sovereigns according to their risks.