Sovereign default risk in Euro Area leads to credit crunch and economic downturn.
The study looked at how the risk of countries not being able to pay their debts affected the ability of businesses to get loans during the European debt crisis. By analyzing data from Italy, Spain, Portugal, and Ireland, the researchers found that when a country's creditworthiness dropped, it led to less lending to businesses and a decrease in economic activity in those countries. This happened because banks had less valuable assets and were less willing to lend money to private businesses.