A simple question: does government support for the banking system make banks more creditworthy? The common sense answer is, yes. The financial markets, however, managed to reach the opposite conclusion. Since February, financial corporate bond spreads have widened almost two percentage points. The cost of insuring against senior bank debt default in Europe doubled before retracing slightly over the past week. Put bluntly, the credit market now apparently fears that government rescues are bad for the banks.

During February and early March, turbulence in the bank bond sector arrested the drop in yields in other corporate bond sectors and stalled the general improvement in the credit markets. The weakness in bank debt was probably the main catalyst for the last leg lower in equity markets. The concern appears to be centred on fears that governments might force bank bond holders to take a share of future losses.