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COVID-Induced Sovereign Risk in the Euro Area: When Did the ECB Stop the Contagion?

Aymeric Ortmans and Fabien Tripier

Working Papers from CEPII research center

Abstract: This paper studies how the announcement of ECB’s monetary policies has stopped the contagion of the COVID-19 pandemic in the European sovereign debt markets. We show that up to March 9, the occurence of new cases in euro area countries has a sizeable and persistent effect on 10-years sovereign bond spreads relative to Germany: the occurrence of 1000 new cases is accompanied by an immediate increase in the spread which lasts 5 days after, reaching an increase of 0.54 percentage point. Afterwards, the effect is close to zero and not significant. We interpret this change as a successful outcome of the ECB’s press conference on March 12 despite the ”we are not here to close spreads” controversy. Indeed, a counterfactual shows that without this shift in the sensitivity of sovereign bond markets to COVID-19, spreads would have surged to 4.4% in France, 9.6% in Spain, and 19.2% in Italy as early as March 18, when the ECB’s Pandemic Emergency Purchase Programme has finally been announced.

Keywords: COVID-19; European Central Bank; Sovereign debt; Monetary policy; Local projections (search for similar items in EconPapers)
JEL-codes: E52 E58 E65 H63 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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