We analyze the interconnection between the sovereign and banking sector risk in the peripheral euro area countries over the 2004Q4-2013Q2 period. Applying the contingent claims methodology, we build indicators of sovereign and banking sector risk (incorporating both market and balance sheet based information) and assess their interconnection in comparison with existing market-based indicators of banking and sovereign distress. We use three different statistical measures of interconnection based on principal components analysis, Granger causality network and Diebold-Yilmaz's connectedness index, and apply them to quarterly credit risk data. The empirical results shows strong connectedness and comovement between country-level banking and sovereign risk indicators. We find evidence of bi-directional bank-sovereign linkage for Spain and Italy during the European sovereign debt crisis period. For the late crisis period, we find weak interconnection and more divergence across the various risk indicators. Our findings also suggest that secondary and derivatives market indices are more driven by common underlying factors than are contingent claim based risk measures.