This time it was German Chancellor Angela Merkel and French President Nicolas Sarkozy walking on the beach at Deauville in Normandy who agreed that the investors in government bonds – among which many banks – in the future would have to share in losses. Until then the financial system took it as a given that euro area government debt was always repaid.
That was why government bonds were used as safe collateral in transactions. In Deauville that ‘given’ was taken away. How hard did that hit? The interbank markets were completely frozen.