International Capital Market Association chief executive Martin Scheck says the financial crisis is in its “most serious phase” at present because sovereign debt markets are not functioning well.

Speaking to GFS this month, Scheck says that risk has migrated from corporates and is now in the sovereign sector, which is impacting upon the rest of the European financial market.

He says: “What I do think has happened is that the bedrock of the financial markets, which has always been the underlying sovereign debt markets, are not functioning well. This causes widespread problems since these are a reference for the corporate debt markets and have traditionally had the highest levels of liquidity, so when that market breaks down it impacts on absolutely all of the markets.”

Scheck says the different phases of the crisis – sub-prime, real estate, credit crunch, banking crisis and now sovereign debt crisis have over-layered each other.

He says: “They are difficult to separate, but once the sovereign debt markets really do not function well, that is probably the most serious phase of the crisis we have been in so far.

“Clearly there are risks within the sovereign sector, there is heightened understanding of credit risks within the sovereigns, and you see that in the way the sovereigns are trading.

“I think it has been a gradual spreading of risk.”