Sovereign risk and credit default swaps: implications for Latvia

Abstract

The thesis addresses the fundamental aspect of financial stability in the context of the implications of Latvia for fiscal policy and public debt. It aims to determine the position of Latvia in terms of public debt sustainability and sovereign risk. Furthermore, it assesses the application of Basel III framework at both national level and level of the European Union with an emphasis on the role of credit default swaps. The findings of the thesis reveals that although the fiscal outlook alongside the level of sovereign risk remains stable, increase within the level of public debt rises concerns of sovereign exposure by, thereby, posing potential risks to financial stability. Consequently, the use of credit default swaps as a sovereign risk mitigation instrument has a beneficial effect by ensuring banks with an opportunity to hedge against sovereign risk by, thereby, strengthening financial resilience, especially, during times of financial disruptions.