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It’s not time to make a change: sovereign fragility and the corporate credit risk

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  • Fornari, Fabio
  • Zaghini, Andrea

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. JEL Classification: C21, G12, G14

Suggested Citation

  • Fornari, Fabio & Zaghini, Andrea, 2022. "It’s not time to make a change: sovereign fragility and the corporate credit risk," Working Paper Series 2740, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222740
    Note: 495651
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    More about this item

    Keywords

    credit default swaps; credit rating; sovereign risk spillover;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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