Credit Risk Premiums of European Companies

This chapter examines the credit risk premiums of 131 European companies as the difference between their CDS spreads and expected losses. The period between September 2012 and December 2021 is considered, i.e. when the interest rate level in the Eurozone was at the zero lower bound. Using panel data regressions, a positive relationship is found between these risk premiums and various operationalisations of the risk-free interest rate. Additionally, the results show that, ceteris paribus, credit risk premiums in Eurozone countries were lower than those in European countries outside the Eurozone in each of the periods following the ECB's announcements of the PSPP (Public Sector Purchase Programme) and the CSPP (Corporate Sector Purchase Programme). This can be interpreted as an indication of higher risk appetite in Eurozone countries, driven by a search for yield behaviour. In contrast, the effects in the period following the ECB's announcement of the PEPP (Pandemic Emergency Purchase Programme) are ambiguous.