These governments have also issued bonds to cover budget deficits and public debt has been rising. In emerging market countries, the average ratio of public debt to Gross Domestic Product (GDP), a critical indicator of a country's fiscal health, rose to a record 67%, according to Chapter 2 of the april 2022 edition of the IMF's Financial Stability Report.

The bulk of that credit comes from emerging market banks, whose holdings of government debt as a percentage of assets reached a historic level of 17% in 2021. In some economies, government debt accounts for a quarter of bank assets. The result is that emerging market governments are highly dependent on credit from domestic banks, and domestic banks are highly dependent on government bonds as collateral for central bank financing.

Economists have a name for this interdependence between banks and governments. They call it the "sovereign-bank nexus" because public debt is also known as sovereign debt, a holdover from the Middle Ages, when it was kings and queens who borrowed.

There is reason to be concerned about this nexus. High holdings of sovereign debt expose banks to losses if public finances come under pressure and government debt loses value in the market. That could force banks, especially those that are less well capitalized, to cut credit to businesses and households, weighing down economic activity.