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.
Lacklustre demand for the bonds could push the countries' borrowing costs into unsustainable territory. To make sure that doesn't happen, banks in each country are likely to face heavy pressure to participate in the auctions, experts say. Already, they are among the biggest holders of the bonds, accounting for about 16 per cent of Italy's outstanding government debt securities and about 23 per cent in Portugal.
The deep financial links between European governments and their banks have played a part in fuelling the Continent's debt crisis. Banks across Europe are collectively holding hundreds of billions of euros of bonds issued by countries that investors fear are at risk of default. Worries about whether the banks are strong enough to survive losses on their government-bond holdings have ignited fears that strained governments might need to bail out their banks.
Investors have been punishing banks holding big portfolios of debt issued by countries such as Greece, Ireland, Italy, Portugal and Spain. And regulators have provided further reason for banks to pare their positions. The European Banking Authority is in the process of calculating new capital requirements for banks, based partly on their holdings of risky government bonds. The more such bonds they're holding, the more capital they will need to protect against potential losses.
When some European banks have begun selling chunks of their sovereign debt in the market, their governments have urged them to stop, according to people familiar with the matter. In some cases, the requests have persuaded banks to stop shrinking their government-bond portfolios, the people said.
Aside from government pressure, there's another powerful reason for struggling banks to retain their stashes of government bonds. The banks can pledge the securities as collateral for loans from the European Central Bank. Some governments are approaching banks for loans to finance their day-to-day operations.
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