• contagion
• ratings
• redenomination.
• risk-aversion
• spreads

Following the emerging markets crises of the 1980s and 1990s, sovereign risk was mostly seen as a distinguishing feature of emerging economies, which were experiencing recurring cycles of large capital inflows followed by credit and asset-price booms and financial crises. However, in the last few years, there has been a growing interest in the risk of default of developed economies, as a result of the accumulation of huge levels of public debt by a number of countries, and in particular euro area countries. The increase in the default risk premia on bonds issued by the central governments of the euro area, and the increase in the CDS spreads referencing these bonds, both suggest a re-pricing of risk since the sovereign debt crises broke out. Investors became much more risk averse, notably vis-à-vis countries with deteriorating public finances. Against this background, we will focus on which factors may have contributed to changes in financial markets’ perception of sovereign risk during the crisis. Specifically, we will present a review of the existing literature describing the role of contagion effects and fears of currency redenomination in investors’ pricing of sovereign credit risk in the EMU.