When Bank for International Settlements officials warned last week that government debt was pressuring central banks, financial markets barely blinked. Another routine warning from Basel, investors figured. Just more regulatory hand-wringing. They couldn't have been more wrong.

Buried in regulatory filings from London to Tokyo lies evidence of a crisis that has been brewing in plain sight. European banks are sitting on €2.3 trillion in government bonds. Japanese insurers are quietly reducing their holdings of sovereign debt. Emerging market banks have amassed a record amount of government bonds, with their sovereign exposure nearing 20% exposure. None of this would matter much, except for one problem: the rules that govern global finance treat all this government debt as perfectly safe. Zero risk. As safe as cash.