At the end of 2009, countries in the Eurozone began to experience a sudden divergence of bond yields as the market perception of sovereign default risk increased. The theory of complete markets suggests that sovereign debt spreads and credit default swap (CDS) premia should track each other very closely, as a CDS is in effect a short bond position. In addition, liquidity risk should be priced into both instruments in such a way that buying exposure to the same default risk is identically priced. We use a time-varying vector autoregression framework to establish the credit and liquidity spreads interactions over the crisis period. We find substantial variation in the patterns of the transmission effect between maturities and across countries. Our major result is that for several countries including Greece, Portugal and Ireland the liquidity of the sovereign CDS market has a substantial influence on sovereign debt spreads. This evidence is of particular importance in the current policy context.