Sovereign Contagion
From Open Risk Manual
Definition
Sovereign Contagion is a form of Risk Contagion manifesting during certain Country Risk events.
Manifestation
Sovereign contagion manifests as a sequence or cascades of events whereby the deteriorating condition of sovereign finances and/or other Political Risk factors precipitate stress conditions to a variety of other entities:
- sub-sovereigns / local governments and other public sector entities
- financial institutions
- corporates in sectors closely linked to the sovereign
- individuals in sectors closely linked to the sovereign
Issues and Challenges
- Sovereign contagion is sometimes used to denote joint (correlated) deterioration of distinct markets impacted by Sovereign Risk. While related, the context discussed here focuses on event risk, not market expectation risk. Such event risk may affect e.g. the credit risk profile of segments of the economy that are typically not traded in markets
