<abstract xmlns="http://www.w3.org/1999/xhtml">

<p>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.</p>
</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.

Measuring Sovereign Credit Risk of the EU countries

Journal of Central Banking Theory and Practice

This work is licensed under the Creative Commons Attribution 4.0 International License.

{"article-title":"Measuring Sovereign Credit Risk of the EU countries"}

European countries have increased significantly their public debt since the Global Financial Crisis. The increasing trend and the high concentration of public...

Measuring Sovereign Credit Risk of the EU countries

Published Online: Sep 06, 2021

Page range: 169 - 192

Received: Mar 01, 2020

Accepted: May 27, 2020

DOI: https://doi.org/10.2478/jcbtp-2021-0030

Keywords
sovereign credit risk, contingent claims analysis, stress-testing

© 2021 Vojtěch Siuda et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Measuring Sovereign Credit Risk of the EU countries

Published Online: Sep 06, 2021

Page range: 169 - 192

Received: Mar 01, 2020

Accepted: May 27, 2020

DOI: https://doi.org/10.2478/jcbtp-2021-0030

Keywordssovereign credit risk, contingent claims analysis, stress-testing

© 2021 Vojtěch Siuda et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Keywords
sovereign credit risk, contingent claims analysis, stress-testing