It’s Not Time To Make a Change: Sovereign Fragility and the Corporate Credit Risk

45 Pages Posted: 28 Feb 2021

See all articles by Fabio Fornari

Fabio Fornari

European Central Bank (ECB)

Andrea Zaghini

European Central Bank (ECB)

Date Written: December 14, 2020

Abstract

Relying on a perspective borrowed from monetary policy announcements and introducing an econometric twist in the traditional event study analysis, we document the existence of an .event risk transfer., namely a significant credit risk transmission from the sovereign to the corporate sector after a sovereign rating downgrade. We find that after the delivery of the downgrade, corporate CDS spreads rise by 36% per annum and there is a widespread contagion across countries, in particular among those which were most exposed to the sovereign debt crisis. This effect exists on top of the standard relation between sovereign and corporate credit risk.

Keywords: sovereign rating, corporate credit risk, CDS spreads

JEL Classification: G15, G32, G38

Suggested Citation

Fornari, Fabio and Zaghini, Andrea, It’s Not Time To Make a Change: Sovereign Fragility and the Corporate Credit Risk (December 14, 2020). CFS Working Paper, No. 652, 2020, Available at SSRN: https://ssrn.com/abstract=3785620 or http://dx.doi.org/10.2139/ssrn.3785620

Fabio Fornari

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Andrea Zaghini (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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