In the event of a disaster, public finances play a key role when there are spillover effects of credit risk between eurozone governments and national companies
How do sovereign credit risks relate to those of domestic firms? Given house-sized corporate and government debt in advanced economies, it is important from an academic and policy perspective to understand this relationship comprehensively. For financial firms, and banks in particular, the fundamental characteristics of these active mechanisms are driven by the so-called "doom loop," the negative spiral that can occur when banks threatened with insolvency hold government bonds and governments with weak public finances bail out these banks. (cf., z. B., Acharya et al., 2014; Brunnermeier et al., 2016; Farhi and Tirole, 2018).
Moreover, empirical research has shown that credit risks are transferred between the state and the national non-financial sector (cf., z. B., Lee et al., 2016; Almeida et al., 2017). This research soberingly shows that an increase in sovereign risk negatively affects the ability of firms to repay debt, and thus their creditworthiness. Generally, these effects are thought to be magnified in states with already low fiscal space and high credit spreads because: These states have concerns about higher corporate taxes in the future as credit conditions deteriorate and anticipate a general impairment of the legal, political, and economic framework (Corsetti et al., 2013; Augustin et al., 2018).
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