THE IMPACT OF PROBABILITY OF DEFAULT AND SOVEREIGN RISK ON ECONOMIC GROWTH VARIANCE

Abstract

The banking crises create the need to capture, in the most refined form possible, the vulnerabilities of the banking system. Early warning indicators help in capturing signals that predict, in a timely manner, the likelihood of a banking crisis. In addition, the sovereign risk, captured by CDS 5Y, proved to have a major impact on the probability of default, which negatively influenced economic growth. The results were captured using a Vector Autoregression Model on a sample of EU member states.