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

58 Pages Posted: 29 May 2020 Last revised: 10 Sep 2020

See all articles by Patrick Augustin

Patrick Augustin

McGill University, Desautels Faculty of Management

Valeri Sokolovski

HEC Montreal - Department of Finance

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

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 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). NYU Stern School of Business, 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

Valeri Sokolovski

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

HOME PAGE: http://www.hec.ca/en/profs/valeri.sokolovski.html

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance ( email )

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

Davide Tomio (Contact Author)

Darden School of Business ( email )

100 Darden Boulevard
Charlottesville, VA 22903
United States

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