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How is a firm’s credit risk affected by sovereign risk?

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  • Breckenfelder, Johannes

Abstract

When a country sees its sovereign credit risk rise, do companies in that country also see their credit risk increase? We show that the answer is yes. Companies with a large public-sector ownership, as well as companies that borrow heavily from banks, are most affected. This suggests that the transmission of credit risk from sovereigns to non-financial companies occurs primarily through a fiscal and a financial channel, and points to the importance of reducing such risk spillovers and thereby overall risk in the economy, e.g. by means of the capital markets union. JEL Classification: F34, F36, G15, H81, G12

Suggested Citation

  • Breckenfelder, Johannes, 2018. "How is a firm’s credit risk affected by sovereign risk?," Research Bulletin, European Central Bank, vol. 53.
    • Handle: RePEc:ecb:ecbrbu:2018:0053:
    Note: 1125999
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    2. Carlo Altavilla & Marco Pagano & Saverio Simonelli, 2017. "Bank Exposures and Sovereign Stress Transmission," Review of Finance, European Finance Association, vol. 21(6), pages 2103-2139.
    3. Viral V Acharya & Tim Eisert & Christian Eufinger & Christian Hirsch, 2018. "Real Effects of the Sovereign Debt Crisis in Europe: Evidence from Syndicated Loans," The Review of Financial Studies, Society for Financial Studies, vol. 31(8), pages 2855-2896.
    4. Gennaioli, Nicola & Martin, Alberto & Rossi, Stefano, 2018. "Banks, government Bonds, and Default: What do the data Say?," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 98-113.
    5. Bottero, Margherita & Lenzu, Simone & Mezzanotti, Filippo, 2020. "Sovereign debt exposure and the bank lending channel: Impact on credit supply and the real economy," Journal of International Economics, Elsevier, vol. 126(C).
    6. Patrick Augustin & Hamid Boustanifar & Johannes Breckenfelder & Jan Schnitzler, 2018. "Sovereign to Corporate Risk Spillovers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(5), pages 857-891, August.
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    Cited by:

    1. Evgenia Grigoryeva, 2021. "Determinants of Russia's Sovereign Risk," Russian Journal of Money and Finance, Bank of Russia, vol. 80(4), pages 74-97, December.

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    More about this item

    Keywords

    credit risk; non-financials; risk transmission; sovereign;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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