In Sickness and in Debt: The COVID-19 Impact on Sovereign Credit Risk

56 Pages Posted: 29 May 2020 Last revised: 11 Aug 2021

See all articles by Patrick Augustin

Patrick Augustin

McGill University; McGill University, Desautels Faculty of Management

Valeri Sokolovski

University of Alberta - School of Business

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business

Davide Tomio

Darden School of Business

Date Written: July 17, 2020

Abstract

The COVID-19 pandemic provides a unique setting in which to evaluate the importance of a country's fiscal capacity in explaining the relation between economic growth shocks and sovereign default risk. For a sample of 30 developed countries, we find a positive and significant sensitivity of sovereign default risk to the intensity of the virus' spread for fiscally constrained governments. Supporting the fiscal channel, we confirm the results for Eurozone countries and U.S. states, for which monetary policy can be held constant. Our analysis suggests that financial markets penalize sovereigns with low fiscal space, thereby impairing their resilience to external shocks.

Keywords: COVID-19, coronavirus, credit risk, debt, fiscal capacity, pandemic, sovereign

JEL Classification: C3, F34, E44, G12, G15, H63

Suggested Citation

Augustin, Patrick and Augustin, Patrick and Sokolovski, Valeri and Subrahmanyam, Marti G. and Tomio, Davide, In Sickness and in Debt: The COVID-19 Impact on Sovereign Credit Risk (July 17, 2020). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3613432 or http://dx.doi.org/10.2139/ssrn.3613432

Patrick Augustin

McGill University, Desautels Faculty of Management ( email )

1001 Sherbrooke Street West
Quebec
Montreal, Quebec H3A 1G5
Canada

HOME PAGE: http://www.patrickaugustin.se

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

HOME PAGE: http://https://patrickaugustin.ca/

Valeri Sokolovski

University of Alberta - School of Business ( email )

2-43 Business Building
Edmonton, Alberta T6G 2C7
Canada

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Davide Tomio (Contact Author)

Darden School of Business ( email )

100 Darden Boulevard
Charlottesville, VA 22903
United States

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