We model a loop between sovereign and bank credit risk. A distressed financial sector induces government bailouts … sovereigns and banks for 2007-11, we show that bailouts triggered the rise of sovereign credit risk. We document that post-bailout … changes in sovereign CDS explain changes in bank CDS even after controlling for aggregate and bank-level determinants of …

The U.S. bank stress tests aim to improve financial system stability. However, they may also affect bank credit supply …

protection selling in CDS, the effect being weaker when sovereign risk is high. Bank and country risk variables are mostly not … building a complete picture and understanding fully the economic drivers of the bank-sovereign nexus of risk. …

We show that financial sector bailouts and sovereign credit risk are intimately linked. A bailout benefits the economy …-financial sector to fund the bailout may be inefficient since it weakens its incentive to invest, decreasing growth. Instead, the … sovereign may choose to fund the bailout by diluting existing government bondholders, resulting in a deterioration of the …

We show that financial sector bailouts and sovereign credit risk are intimately linked. A bailout benefits the economy …-financial sector to fund the bailout may be inefficient since it weakens its incentive to invest, decreasing growth. Instead, the … sovereign may choose to fund the bailout by diluting existing government bondholders, resulting in a deterioration of the …

We show that nancial sector bailouts and sovereign credit risk are intimately linked. A bailout benets the economy by … bailout may be inecient since it weakens its incentive to invest, decreasing growth. Instead, the sovereign may choose to fund … the bailout by diluting existing government bondholders, resulting in a deterioration of the sovereign's creditworthiness …