The COVID-19 pandemic and sovereign credit risk

Wei-Fong Pan, Xinjie Wang, Ge Wu and Weike Xu

China Finance Review International, 2021, vol. 11, issue 3, 287-301

Abstract: Purpose - The purpose of this study is to examine the effects of the coronavirus disease 2019 (COVID-19) pandemic on sovereign credit default swap (CDS) spreads using a large sample of countries. Design/methodology/approach - In this paper, the authors use a wide set of the sovereign CDS data of 78 countries. To measure the magnitude of the COVID-19 pandemic, the authors use the daily change of confirmed cases collected from Our World in Data. They use panel regressions to estimate the impact of the COVID-19 pandemic on sovereign credit risk. Findings - The authors show how sovereign CDS spreads have widened significantly in response to the COVID-19 pandemic. Based on the most conservative estimate, a 1% increase in COVID-19 infections leads to a 0.17% increase in sovereign CDS spreads. Furthermore, this effect is stronger for developing countries and countries with worse healthcare systems. Government policies partially offset the impact of the COVID-19 pandemic, although these same policies also lead to widening sovereign CDS spreads. Sovereign CDS spreads narrow dramatically several months after the outbreak of the COVID-19 pandemic. Overall, the results suggest that the ongoing COVID-19 pandemic has been a massive shock to the global financial stability. Originality/value - This paper provides new evidence that COVID-19 widens sovereign CDS spreads. The authors further show that this widening effect is felt most strongly in developing economies.

Keywords: Crisis; Economic uncertainty; COVID-19; Pandemic; Sovereign CDS spread (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:cfripp:cfri-01-2021-0010

DOI: 10.1108/CFRI-01-2021-0010

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