The core, the periphery, and the disaster: Corporate-sovereign nexus in COVID-19 times

Ruggero Jappelli, Loriana Pelizzon () and Alberto Plazzi

No 331, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We show that the COVID-19 pandemic triggered a surge in the elasticity of non-financial corporate to sovereign credit default swaps in core EU countries, characterized by strong fiscal capacity. For peripheral countries with lower budgetary slackness, the pandemic had essentially no impact on such elasticity. This evidence is consistent with the disaster-induced repricing of government support, which we model through a rare-disaster asset pricing framework with bailout guarantees and defaultable public debt. The model implies that risk-adjusted guarantees in the core were 2.6 times those in the periphery, suggesting that fiscal capacity buffers provide relief to firms' financing costs.

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)
Date: 2021
New Economics Papers: this item is included in nep-eec
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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:zbw:safewp:331

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