Credit Risk in the Euro Area

Abstract

We construct credit risk indicators for euro area banks and non‐financial corporations. These indicators reveal that the financial crisis of 2008 dramatically increased the cost of market funding for both banks and non‐financial firms. In contrast, the prior recession following the 2000 US dot‐com bust led to widening credit spreads of non‐financial firms but had no effect on the credit spreads of financial firms. The 2008 financial crisis also led to a systematic divergence in credit spreads for financial firms across national boundaries. Credit spreads provide substantial predictive content for real activity and lending measures for the euro area as a whole and for individual countries.