IGTA Journal - Winter 2020/2021

29/01/2021 The sovereign-bank-corporate nexus – virtuous or vicious? https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210128~8f5dc86601.en.html 8/13 Sources: Fitch Ratings, Moody’s, Standard & Poor’s, DBRS and ECB calculations. Notes: The rating shown represents the median of the long-term issuer ratings assigned by Standard & Poor’s, Moody’s, Fitch Ratings and DBRS. The bubble size indicates the combined debt of sovereigns and banks (debt securities issued) in a country as a share of the euro area total. Given that corporate health has become more dependent on the domestic sovereign’s fiscal support, the withdrawal of government support could lead to cliff effects, giving rise to financial instabilities. [9] It could trigger corporate defaults, a rapid rise in non-performing loans (NPLs) and tighter financing conditions. This, in turn, could cause problems in the banking sector, deepening the recession and further eroding the sovereign’s revenues, while requiring even more guarantees and higher public debt, putting pressure on the sovereign’s credit standing. In other words, the interlinkages between banks, sovereigns and corporates, which were crucial for stabilising the economic and financial situation during the pandemic, could turn into a vicious circle, giving rise to destabilising feedback loops ( Chart 8 ). Chart 8 A vicious circle between sovereigns, banks and corporates IGTA eJournal | Winter 2020/21 | 13