COVID-Induced Sovereign Risk in the Euro Area: When Did the ECB Stop the Contagion?
Aymeric Ortmans and
Working Papers from CEPII research center
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)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:cii:cepidt:2020-11
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