This paper shows that a small open economy's sovereign credit risk has direct effects on the real economy within an integrated economic region. To establish a causal relationship between sovereign credit risk and corporate borrowing costs, we exploit an exogenous shock to Greece in April 2010. We uncover that for a 1% increase in the Greek sovereign CDS, non-Greek European corporate borrowing costs increase on average by 0.18% over and above average borrowing costs. Cross-sectional evidence suggests that companies with subsidiaries in Greece and those sharing a common currency are affected more heftily by approximately 3 and 4 basis points respectively. There seem to be no differential effects between financially dependent or publicly owned companies proposing that deep credit lines or implicit bailout guarantees government might provide are not important for corporates.