Banks Bought Bonds Amid Debt Crisis

Source: The New York Times

FRANKFURT — Even as Europe’s sovereign debt crisis intensified early this year, banks continued to load up on debt from Greece and other countries with the most acute fiscal problems, according to a report released Sunday that also suggested that the European Central Bank inadvertently encouraged institutions to increase their risk.

Banks increased the amount of credit they extended to government and the private sector in Greece, Ireland, Portugal and Spain by 4.3 percent, or $109 billion, in the first quarter of 2010 compared with the previous quarter, the Bank for International Settlements said. The additional credit brought banks’ total exposure to the four countries to $2.6 trillion. The B.I.S., located in Basel, Switzerland, serves as a clearinghouse for the world’s central banks.

European banks increased their holdings to the four countries more than banks from the United States or other places outside of Europe, possibly because banks in the euro zone could use debt from Greece and the other countries as collateral for low-interest loans from the European Central Bank, the B.I.S. said in its quarterly report.

Read more: http://www.nytimes.com/2010/09/06/business/global/06bi.html

Heads: Debt bought at a good price. Debt gets repaid at par. Bankers get paid massive bonus.
Tails: Government bails out banks (either directly or by bailing out the lender (Greece). Debt gets repaid at par. Bankers get paid massive bonus.