The author investigates whether bank exposures to sovereign debt during the European debt crisis affected the real economy. He shows that bank marked-to-market (MTM) losses on sovereign debt led to a credit tightening that had negative real effects on small and young firms, even in countries not under stress. Since banks do not usually MTM their holdings of sovereign bonds, the author explores the transmission channels of sovereign losses on credit supply. He shows that sovereign losses reduced bank short-term funding from US money market funds rather than affecting equity or working through alternative channels.