Sovereign and corporate credit risk: Evidence from the Eurozone

Mascia Bedendo (1) , Paolo Colla (2)

1 Audencia Recherche
2 Bocconi University

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 credit spreads is associated with a statistically and economically significant increase in corporate spreads 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

Domains: Quantitative Finance [q-fin]; General Finance [q-fin.GN]

Mascia Bedendo, Paolo Colla. Sovereign and corporate credit risk: Evidence from the Eurozone. Journal of Corporate Finance, 2015, 33, pp.34-52. ⟨10.1016/j.jcorpfin.2015.04.006⟩. ⟨hal-01157174⟩