Questioning collateral

European financial markets have been turned upside down by the sovereign debt crisis, with eurozone government bonds no longer regarded as completely risk-free. As a result, dealers are more wary of the correlation inherent in collateral denominated in domestic currency posted by local banks. Mark Pengelly reports

Long-held financial principles have been turned on their head by the eurozone debt crisis. Once, corporate debt was considered more risky than sovereign bonds, which were largely assumed to be risk-free. This is no longer the case. The amount of debt racked up by various European countries has caused some to predict a restructuring of Greek bonds and raised fears about the future of the euro. While an emergency loan package by the European Union (EU) and International Monetary Fund, combined