Banks battle to hold sovereign debt

Domestic banks have ramped up their holdings of sovereign debt since the financial crisis erupted a few years ago.

However, if confidence in the sovereign is undermined then it can have negative consequences for the banking system which would damage the wider economy, according to an IMF study of the sovereign debt markets.

Even if a country has a high proportion of international investors holding its debt, it faces huge refinancing risks in the event that country is downgraded and investors offload their positions.