Conditional probabilities and contagion measures for euro area sovereign default risk

The continuing debt crisis in the euro area raises the issue of measuring and monitoring interconnected sovereign credit risk. In this article we review approaches to measuring sovereign default risk and its cross-country impact, and present an empirical framework permitting an assessment of the likelihood of joint and conditional default of euro area sovereigns based on observed prices for credit default swaps on sovereign debt. In this way we contribute to the discussion about the extent to which euro area capital markets are affected by contagion concerns, and to what extent priced credit risks are affected by policy measures. JEL Classification: C32, G32