Far from being the classic “risk management tool”, government bonds today are beginning to look like toxic assets. And bailing out the governments issuing these bonds is tantamount to bailing out the banks… yet again. So hypothesises INSEAD Finance Professor Theo Vermaelen…
European taxpayers are asked to bail out Greece and other southern European countries to avoid a financial meltdown. The logic is that most Greek and other government debt are held by banks, so if we let these countries default the banks will default, so we are back to November 2008. So we are really asked to bail out banks, but given that banks are hated so much we are told that we are saving the Club Med countries and the European Monetary Union. However, the recent collapse in European bank stocks suggests that markets increasingly believe that German, Dutch and Finnish voters won’t agree to this second bank bailout in three years.
[This article is republished courtesy of INSEAD Knowledge, the portal to the latest business insights and views of The Business School of the World. Copyright INSEAD 2024]