Triple threat to sovereign default-risk-free status
European policymakers and regulators are considering dramatic changes to the capital treatment for government bonds
Regulators and policymakers in the European Union (EU) are weighing three measures that would strip government bonds of their default-risk-free status, making them more costly for banks to hold in capital terms. That might seem a rational response to fears of restructuring or default of Greece, Ireland and Portugal, but it begs the question of whether - and how - a new capital regime would differentiate between issuers whose yields have fanned out across a 900 basis point spectrum.
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