Browse Stacks: Government: 'Doom loop' tying European banks and governments reinforced | Reuters

LONDON, Dec 16 (Reuters) - European banks have filled their balance sheets with national debt since 2011, bringing them easy profits but reinforcing a "doom loop" linking weak banks to governments with shaky finances.

The euro zone debt crisis showed banks can suffer big losses from holdings of their own countries' bonds, which in turn can torpedo state finances if banks need to be bailed out.

Policymakers have been trying to loosen the mutual exposure of banks and governments that ensured they dragged one another down during the crisis.

But the European Banking Authority (EBA), the European Union's banking watchdog, said on Monday the share of bonds issued by sovereigns under stress held by their domestic banks had "increased markedly" between December 2010 and June 2013.

The net exposure of banks to sovereign debt fell 9 percent in 2011 but then rose 9.3 percent in the 18 months to June this year, data released by the EBA showed.

The data confirms what many already suspected - that banks, particularly in Italy and Spain, have been ploughing cheap funds from the European Central Bank into buying more of their own countries' bonds, a lucrative carry trade that has also helped ensure governments can fund their deficits at sustainable rates.