Sovereign and Corporate Credit Risk: Evidence from the Eurozone
49 Pages Posted: 6 Feb 2013 Last revised: 14 May 2015
Date Written: June 1, 2013
We study the impact of sovereign risk on the credit risk of the non-financial corporate sector in the Eurozone using credit default swap data. We show that an increase in sovereign risk is associated with a statistically and economically significant increase in corporate credit risk and, hence, firms’ borrowing costs. A deterioration in a country’s credit quality affects more adversely firms that are more likely to benefit from government aid, those whose sales are more concentrated in the domestic market, and those that rely more heavily on bank financing. Our findings suggest that government guarantees, domestic demand, and credit markets are important credit risk transmission mechanisms.
Keywords: sovereign risk, corporate credit risk, credit default swaps, Eurozone
JEL Classification: G01, G15, G32
Suggested Citation: Suggested Citation