Some European nations, struggling to find buyers for their bonds, are pressuring their own already-stressed banks to fill the gap by acting as lenders of last resort—in certain cases, pushing the amount of risky European debt on those institutions’ books even higher.
Italy and Portugal, among other European governments, are leaning on their banks to continue buying—or at least to stop selling—government bonds, according to people familiar with the matter.
Meanwhile, in Spain and other European countries, the quantities of loans banks are doling out to local and national governments have been rising sharply.
The pressure reflects mounting worry in Europe’s financially shaky countries that, without buyers, their own borrowing costs will spiral out of control. At the same time it presents banks with a paradox: While investors and regulators want the banks to sell off their holdings of European sovereign debt, local politicians are twisting arms to make sure they don’t.
David Enrich, Sara Schaefer Muñoz and Patricia Kowsmann, Wall Street Journal, November 29, 2011