Financial stress transmission from sovereign credit market before and after the Tunisian and Egyptian revolutions

Political instability and market reassessment of sovereign credit risk pricing could be considered as being the most relevant determinants of Tunisian and Egyptian sovereign CDS spreads volatility. In fact, after the “Arabic Spring” revolutions, Tunisia and Egypt knew a wave of sovereign credit rating degradations; CDS spreads increases and economic fundamentals deterioration. Under dictatorial political regimes, these two economies seemed to be economically stable despite their worsening macroeconomics fundamentals. We use VAR/VECM models and generalized impulse responses to assess financial stress transmission between the sovereign CDS market, the real economy and financial market before and after revolutions. Results show that, after revolutions, investors revaluated the sovereign credit risk of Tunisia and Egypt. Fundamentals deterioration impact has become stronger and rapid but is not the main cause of sovereign CDS spreads increase.