1. bookVolume 10 (2021): Issue 3 (September 2021)
Journal Details
License
Format
Journal
First Published
11 Mar 2014
Publication timeframe
3 times per year
Languages
English
access type Open Access

Measuring Sovereign Credit Risk of the EU countries

Published Online: 06 Sep 2021
Page range: 169 - 192
Received: 01 Mar 2020
Accepted: 27 May 2020
Journal Details
License
Format
Journal
First Published
11 Mar 2014
Publication timeframe
3 times per year
Languages
English
Abstract

European countries have increased significantly their public debt since the Global Financial Crisis. The increasing trend and the high concentration of public debt in portfolios of financial institutions can lead to a financial turmoil we witnessed during the European Sovereign Debt Crisis. Financial stability authorities therefore look for models to measure the sovereign credit risk and develop“what-if”scenarios to assess a potential repercussion of a financial institution rescue or of an economic contraction on sovereign credit risk. The presented article introduces adjustments to the sovereign contingent claims analysis that is based on the Merton´s Credit Risk Model and the Black-Scholes option pricing techniques. The article proposes adjustments by introducing a new view on a stylised liability side of a central government balance sheet, seniority of its items, and a new proxy for risk measure of junior claims. We show reliable results using derived risk sensitivities for 20 EU countries with decent forward looking ability and propose potential stress-testing framework with an application for the Czech Republic.

Keywords

JEL Classification

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