Standard & Poor’s favours banks buying less sovereign debt

Standard & Poor’s Global Ratings (S&P) said a reduction in the amount of government debt held by banks would be a positive step towards protecting the European banking sector from future economic shocks but has warned against any excessive regulation to force the issue.

In a report on the links between European banks and sovereign debt, the rating agency - which recently hinted at a ratings upgrade for Ireland in the not-too-distant future, should Britain remain part of the EU – said if regulation indirectly pushed banks to reduce their exposure they would diversify away from investing in their home nation’s debt.

That, it added, would reduce demand for sovereign debt in general and have implications for the government bond market throughout the EU.