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Breakup and default risks in the great lockdown

Giovanni Bonaccolto, Nicola Borri and Andrea Consiglio

Journal of Banking & Finance, 2023, vol. 147, issue C

Abstract: In this paper, we exploit CDS quotes for contracts denominated in different currencies and with different default clauses to estimate the risk of a breakup of the Eurozone and the propagation of breakup and default risks after the COVID-19 shock. Our main result is that the risk of a Eurozone breakup is significant although, quantitatively, it is not larger than in the period before the COVID-19 shock. In addition, we find that an increase in the redenomination risk in one country is associated with an increase in default premia and bond spreads in other Eurozone countries. Finally, we find that a sizeable fraction of the changes in the cost of insuring against redenomination and default reflects two additional factors: the first captures the insurance cost against a euro depreciation conditional on redenomination, while the second captures liquidity premia.

Keywords: Redenomination risk; Default risk; Covar; Elastic net; COVID-19 (search for similar items in EconPapers)
JEL-codes: C4 C5 G1 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1016/j.jbankfin.2021.106308

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