Banks deliberately bought mispriced periphery debt because size guaranteed bailout

Evidence

Imagine that you knew Greece was still Greece and Italy was still Italy and that the prices quoted in the markets represented the bond-buying activities of banks pushing down yields rather than an estimate of the risk of the bond itself. Why would you buy such securities if the yield did not reflect the risk? You might realize that if you bought enough of them—if you became really big—and those assets lost value, you would become a danger to your national banking system and would have to be bailed out by your sovereign. If you were not bailed out, given your exposures, cross-border linkages to other banks, and high leverage, you would pose a systemic risk to the whole European financial sector. As such, the more risk that you took onto your books, especially in the form of periphery sovereign debt, the more likely it was that your risk would be covered by the ECB, your national government, or both. This would be a moral hazard trade on a continental scale. — Mark Blyth, Austerity, 226

Categorization

• DEFINE: Lays out the moral hazard trade logic step by step: mispriced yield plus systemic-size protection equals rational risk-taking.
• XREF: The deliberate, voluntary nature of risk-taking here chimes with early-onset critiques of financial moral hazard; also echoes the US ‘too big to fail’ argument Blyth develops elsewhere. — connects to: Core-country banks bought peripheral sovereign debt and levered up more than US banks — Mark Blyth, Austerity: The History of a Dangerous…, 37; European banks are collectively too big for any sovereign to bail, forcing austerity instead — Mark Blyth, Austerity: The History of a Dangerous…, 207; Periphery bond buying was a moral hazard trade, not a credibility bet — Mark Blyth, Austerity: The History of a Dangerous…, 222 (+6 more)

Broader Connections

• The sovereign debt crisis is a transmuted and camouflaged banking crisis #corroborates (0.80) — Mark Blyth, Austerity, 35
• Core European banks financed periphery consumption, creating Eurozone imbalances that later turned toxic #expands (0.78) — Mark Blyth, Austerity, 245
• The European debt crisis resulted from banking losses, not sovereign overspending #corroborates (0.75) — Mark Blyth, Austerity, 40
• European austerity serves to reserve sovereign balance-sheet space for too-big-to-bail bank rescues #corroborates (0.75) — Mark Blyth, Austerity, 617
• Neoliberalism’s crisis strategy redirected blame from banks onto state debt #corroborates (0.72) — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 475