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Credit default swaps in Europepartially obscure the comovement between bond yield spreads and CDS premia. Thefirst contribution of our research has therefore been to check the accuracy of credit riskpricing in the CDS market. Does the market perform an important role in providinguseful information to market participants and other observers?We proceed by comparing the theoretically implied CDS premia with the onesestablished by the market. The existence of a stable relationship between the two creditspreads implies a long-run connection between bonds and CDS contracts on the samereference entity, in our case a sovereign. On the one hand, this rules out the possibilitythat credit risk is priced in unrelated ways in the derivative and cash markets. On theother, we cannot discard the hypothesis that large common pricing components ratherthan credit risk affect both prices to some extent.Our research has also addressed the relative efficiency of credit risk pricing in thebond and CDS market. Here we are concerned with the ‘price discovery’ relationshipbetween CDS and bond yield spreads. In particular, can the CDS market anticipate thebond market in pricing, or does it merely adapt to the cash market valuation of creditrisk?Several recent papers study the credit derivative markets. The majority focus on CDScontracts written on corporate bonds 1 , and their data do not cover the past several years,in which the CDS market grew rapidly and then went through the financial crisis. Ofthe few papers devoted to the study of sovereign CDS spreads, most focus on emergingmarkets. We know of only two papers on sovereign credit risk in the European Unionbased on CDS market data. 2 The size of the markets, the intrinsic interest of the recentperiod, and the policy relevance of CDS market performance would seem to justify ourfurther work using a different approach.1 Hull et al (2004) and Blanco et al (2005).2 Arce et al (2011) and Fontana and Scheicher (2010).97