The Loop of the Apocalypse: How the world's banks tied their fate to the same debt that can bury them

The global economy is once again in a delicate balance as a familiar but dangerous pattern re-emerges: the growing interconnectedness of banks and sovereign debt.

In recent years, both European and American banks have significantly increased their holdings of government bonds, rekindling concerns about the stability of the financial system, the Greek press writes. It is no coincidence that JPMorgan CEO Jamie Dimon recently sounded the alarm, warning that the explosive growth of public debt could lead to a bond market crisis if policymakers do not act quickly.

For Wall Street banks such as JPMorgan, Bank of America, Citigroup and Goldman Sachs, the situation is markedly different from the eurozone. US banks hold between $1.5 trillion and $2 trillion in government bonds, according to the latest available data, while in the euro zone the equivalent amount is close to 3 trillion euros.

Although the US has an extremely deep government debt market of more than $30 trillion, banks hold a proportionally smaller share because a significant portion is in the hands of the Fed, foreign central banks, and money market funds.

In Europe

In the eurozone, banks remain closely tied to their governments – a relationship described as a “doomsday loop”. In such a scenario, a deterioration in a country's credit rating leads to a decline in the value of its bonds, causing losses to banks, which in turn may need government support, putting further pressure on public finances.

A year before the 2008 financial crisis, public debt held by eurozone banks was close to €1 trillion, but this rose dramatically in the 2012-2015 post-debt crisis period as increased liquidity by the ECB boosted demand for government bonds, bringing their net exposure to public debt to over €2 trillion. Eurozone governments issued record amounts of debt in 2020 to finance their economic stimulus measures. Today, the net public debt is estimated at almost 3 trillion euros, an increase of about 200%.

Between June 2022 and June 2025, banks in France, Germany and Spain accounted for about 60% of the nearly €700 billion increase in government bond holdings, the highest level since the start of the pandemic. The trend is partly related to the ECB's quantitative tightening program, which prompts credit institutions to replace excess liquidity with high-quality liquid assets such as government bonds, according to Reuters.

At the same time, concerns about the fiscal stability of some eurozone countries are growing. A potential erosion of confidence could limit bank lending and disrupt market liquidity, a member of the Bundesbank warned, reminding us how quickly risk premiums can skyrocket.

European banks have increased their holdings of government bonds by 14% in the past year, a development that could amplify risks in the event of fiscal pressures. The increase also reflects the increased borrowing needs of governments as they borrow more and at higher interest rates to finance defense and other spending, making bonds more attractive to lenders.

Although the rise in yields is currently considered manageable, a new episode of volatility cannot be ruled out, as a sharp rise in interest rates or an economic slowdown could reduce the value of banks' portfolios and revive the “catastrophic loop” scenario, an EBA official warned.

In the USA

On the other side of the Atlantic, bonds held by Wall Street banks hit their highest level since the global financial crisis, as regulatory easing by the Trump administration prompts banks to aggressively return to the $31 trillion government debt market.

Net holdings of Treasuries (net bond exposure related to liquidity and ability to raise cash) held by major banks rose to about $550 billion on average this year, from less than $400 billion in 2025, according to FT calculations based on data from the Federal Reserve Bank of New York. These bonds represent nearly 2% of the total bond market, the largest share since 2007.

Analysts, investors and financial industry executives say the easing of U.S. capital adequacy rules is encouraging big banks to facilitate more Treasury bond deals.

However, this growth carries risks at a time when the US public debt has crossed the 100% barrier, reaching levels once unthinkable for the world's largest economy and threatening to break the record set after World War II.

As of March 31, the US national debt was $31.265 trillion, while the year-ago GDP was $31.216 trillion, according to the WSJ. That means debt has risen to 100.2 percent of GDP, up from 99.5 percent on Sept. 30, when the last fiscal year ended. That figure is expected to rise in the near future as the federal government runs historically large deficits of nearly 6 percent of GDP. The US government spends $1.33 for every dollar it collects in revenue, and this year's budget deficit is projected to reach $1.9 trillion.

With fiscal deficits remaining high and financing needs growing, the question is no longer if there will be pressures on markets, but when and how intense they will be.