We Are Doomed. Banks Are Made To Buy Government Debt.
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By: Jeff Cox
US and European regulators are essentially forcing banks to buy up their own government's debt—a move that could end up making the debt crisis even worse, a Citigroup analysis says.
Regulators are allowing banks to escape counting their country's debt against capital requirements and loosening other rules to create a steady market for government bonds, the study says.
While that helps governments issue more and more debt, the strategy could ultimately explode if the governments are unable to make the bond payments, leaving the banks with billions of toxic debt, says Citigroup strategist Hans Lorenzen.
"Captive bank demand can buy time and can help keep domestic yields low," Lorenzen wrote in an analysis for clients. "However, the distortions that build up over time can sow the seeds of an even bigger crisis, if the time bought isn't used very prudently."
"Specifically," Lorenzen adds, "having banks loaded up with domestic sovereign debt will only increase the domestic fallout if the sovereign ultimately reneges on its obligations."
The banks, though, are caught in a "great repression" trap from which they cannot escape.
"When subjected to the mix of carrot and stick by policymakers...then everything else equal, we believe banks will keep buying," Lorenzen said.
Read More: http://www.cnbc.com/id/47633576
How does "allowing banks to escape counting their country's debt against capital requirements" equate to forcing the banks to buy the debt? I mean suppose they could not count debt against capital if they put money into night time solar cells? It's still a bad risk, why would the banks put a knife to their own throats?