Bank regulations also flatter the fiscal accounts... too much

Claudio Boro, in a very useful and interesting presentation at IMF’s “Rethinking Macro Policy II” forum, mentioned the concept of how financial cycles, during their peak, could so dangerously be flattering the fiscal accounts. 

Indeed, but perhaps what flatters the fiscal accounts even more, are bank regulations, like Basel II, which so extremely flattering assigns a 0 to 20 percent risk-weights to "infallible" sovereigns, allowing the banks to lend to these against zero to 1.6 percent in capital which translates into a mindboggling 62.5 to 1 and up to infinity authorized leverage. 

That translates into much lower borrowing rates for the sovereign (mostly paid by higher borrowing rates for the rest) and as a by product produces what I term as subsidized proxies of risk-free rates.