"A few weeks ago, Claudio Borio, head of research at the Bank for International Settlements, warned in a solemn note to Group of 20 leaders that modern financial policymakers are "driving while just looking in the rear-view mirror": western finance officials have focused so much on past risks that they fail to spot new dangers.
Worse still, as policymakers rush to implement reforms in response to one financial calamity, they are apt to create distortions that pave the way for the next disaster. Just such an unintended consequence could now be festering in the banking sector, as its balance sheets are increasingly stuffed with government bonds.These days, there is a near-unanimous belief among western regulators that one way to prevent a repeat of the 2007-08 crisis is to stop banks taking crazy risks with subprime mortgage bonds or complex instruments such as collateralised debt obligations (CDOs). Instead, banks are being urged to hold a higher proportion of their assets in the form of "safe" instruments, most notably sovereign or quasi-sovereign debt..."
Read on at the link above for Tett's explanation of why government bonds may prove to be more of a risky trap (a la subprime MBS) than a "risk-free" investment.
Speaking of subprime and the problems it hath wrought: if you want to take a quick jog down memory lane to the (relatively) innocent days of summer 2007, check out our post, "Asset backs, subprime: shades of 1990?".
You may also find some additional worthwhile reading on the subject of looming sovereign risk in our related articles section below.
Related articles and posts:
1. Sovereign risk and UK credit ratings - Finance Trends.
2. Sovereign bankruptcies will rise - Puru Saxena at FSO.
3. Marc Faber on sovereign risk (Bloomberg) - Finance Trends.
4. Jim Rogers agrees with Marc Faber (CNBC) - Fund My Mutual Fund.