The Core, the Periphery, and the Disaster: Corporate-Sovereign Nexus in COVID-19 Times

Ruggero Jappelli, Loriana Pelizzon () and Alberto Plazzi
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Ruggero Jappelli: Goethe University, Frankfurt; Leibniz Institute for Financial Research SAFE

No 21-30, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study how the COVID-19 pandemic reshaped the relation between corporate and sovereign credit risk in the cross-section of countries in the European Union. Surprisingly, the outbreak triggered higher elasticity of corporate to sovereign CDS spreads in core countries, which realigned to that of peripheral countries, with lower fiscal capacity, for which the impact of the pandemic on the elasticity was essentially muted. During the pandemic, we observe systematic departures of actual CDS from those implied by a standard structural model of default for larger firms in core EU countries with budgetary slackness. We interpret this evidence in light of a disaster-risk asset pricing model with bailout guarantees and defaultable public debt. Based on the model and a synthetic control method, we show that CDS-implied risk-adjusted bailout guarantees over the medium term were about three times larger in the Core than in the Periphery.

Keywords: COVID-19; Credit Risk; Sovereign Risk; Fiscal Capacity; Bailout (search for similar items in EconPapers)
JEL-codes: F65 G01 G15 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2021-04
New Economics Papers: this item is included in nep-eec and nep-ore
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: The core, the periphery, and the disaster: Corporate-sovereign nexus in COVID-19 times (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2130

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