MACROECONOMIC DETERMINANTS OF SOVEREIGN CREDIT RISK

The recent global financial crisis has highlighted the need to understand financial instability in particular the management of credit risk. In this paper we empirically investigate the link between the macroeconomic fundamentals and sovereign credit risk for particular countries in the Euro-zone, namely: France, Germany, Spain and Portugal. The studied sample was affected by disadvantageous economic conditions. Thus, the identification of credit risk determinants is necessary for a better understanding of financial crisis. Using Autoregressive Distributed Lag Modeling, we didn't retain the same macroeconomic factors to explain the risk of default for the selected countries. The retained models, in addition to explaining to which extent credit risk reacts to the changes of the explanatory variables, serve as tools to stress testing. The results, reinforced by back tests, indicate that the creditworthiness of the studied entities depends largely on macroeconomic fundamentals with various elasticities that require a different economic policy for each country. Furthermore, the assessment of the results shows that an increase in debt has opposite effects on the sovereign credit risk which depend on the country's economic situation. Finally, the study finds that the Treasury Bond Yield follows a mean-reverting process with dissimilar speed of return for each country.