The world's lender of last resort has issued a stark warning that a decade on from the financial crisis banks are still exposed to risky government debt.
The so-called "doom loop", in which banks hold too great a share of state loans on their balance sheets, is still a persistent issue for countries and regulators, the International Monetary Fund (IMF) said in a major report on financial stability, reports the Daily Telegraph.
The warning comes after fresh concerns about the doom loop's impact were raised by Italy's budget proposals. The country has the second highest debt-to-GDP ratio in the eurozone at 132 per cent, after Greece.
Italy's populist leaders are attempting to push ahead with a figure of 2.4 per cent deficit spending. With public finances already under strain the value of Italian bonds fell sharply on the news, driving up borrowing costs and putting pressure on Italian banks, which hold nearly 10 per cent of government debt. Markets across the EU fell as a result.
Overspending by a state pushes down the value of a country's debts, as seen during the Greek debt crisis. This devalues banks' balance sheets if they hold a large proportion of those government bonds. If banks then run out of liquidity, and need bailing out, it can add to a nation's deficit, looping back around and further driving down the value of its debts.