The Accommodation of Public Debt by Commercial Banks

A significant aspect of the bail-out programs was that banks were forced to buy government bonds of European countries in distress (particularly Spain and Portugal) so that interest rates on debt could be contained and the governments would find it easier to repay. This expansion of debt or accommodation, of course, acted as a catalyst and, in effect, it was equivalent to a “European bond” backed by the European Central Bank—an idea that was resisted forcefully, in this form, by Germany. But the effect was the same, on the main. The accommodation of debt and the artificial reduction of interest rates were not in line with the changes that were taking place in the European economies for years, following the significant credit expansion. If it were not for the significant increase of institutional uncertainty generated by the policies that were shaping up in the European Union—given that nothing of this magnitude has been allowed by the Treaty of Maastricht or Basel I—the signals that were given to the private sector, amounted to the fact that “speculation” with the public debt was more profitable compared to fostering transactions in stock markets or real investment.