Sovereign default spread

It is measured either directly, as the gap between a sovereign's bond yield and that of a benchmark issuer of the same maturity in the same currency, or through the credit default swap market, or by mapping the sovereign's credit rating to a spread observed on similarly rated issuers.

It does two jobs in a cross border valuation, and confusing them is what causes double counting. The first job is cleaning the risk free rate. A local currency government yield is not risk free, because governments do occasionally default on debt in their own currency, so subtracting an estimated default spread leaves something closer to a genuine local currency risk free rate.

The second job is as the starting point for a country risk premium on the cost of equity. If you use it for that purpose, you cannot also have left it inside the risk free rate, or you have charged for the same risk twice.

One structural limitation is worth knowing. A sovereign default spread prices the government's willingness and ability to pay its own creditors. That is correlated with, but not the same as, the risk of an arbitrary tax change or a licence being withdrawn from a private company, so treating it as a complete measure of country risk is a convenience rather than a theory.