Greece) and preventing banking problems from spreading to sovereigns (e.g. Ireland, Cyprus) is a key lesson drawn from the crisis. Actual or expected bank bail-outs by national governments increase borrowing costs for sovereigns, while also driving up banks’ funding costs even further. This “doom loop” undermines national efforts to re-establish fiscal sustainability.
Moreover, growing pressures in funding and lending markets have led to a fragmentation of the euro area banking system along national lines. The funding costs of banks and the correlated borrowing costs for their respective sovereigns have increased, particularly in the peripheral economies.