One of the more interesting aspects of the last global financial and economic crisis was the way in which the health of banks, public finances, and the outcome of countries became almost inextricable intertwined. The most obvious thread in this link was that between banks' holding of sovereign debts and the effect on these of the ensuing sovereign fiscal crises. As governments' finances worsened, and concerns rose over their ability to sustainably meet their obligations the value of these assets on the banks' balance sheets quickly deteriorated.
This was not the only channel, though, through which banks' balance sheets and public finances looped in on each other. For, as concerns heightened over individual countries' ability to meet their obligations, even the assurances that the markets had come to expect from governments' regulation and supervision of banks was not worth much any longer. Public finances thus drove both bank runs, and aridity in the interbank markets. How much were bank-held collaterals worth subsequently? Not much! Especially when financial services institutions, themselves, inherited the effects of sovereign credit downgrades.
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