Plus, there’s no system of fiscal transfers to help smooth country-specific needs. This makes the euro area countries that have weak fundamentals more prone to distress.5 The United States and Japan make up the largest share of public debt in advanced economies, but their debt poses less of a worry.
Alternatively, a less effective form of capital, if the government cannot buy bank equity directly with cash, is for it to issue the banks “Government Capitalization Bonds” in exchange for equity. The banks would hold the bonds on their balance sheet. This would tie up part of their balance sheet, but would certainly be capital.