The COVID-19 Pandemic and Sovereign Credit Risk
China Finance Review International, Forthcoming
30 Pages Posted: 22 Jan 2021 Last revised: 29 Apr 2021
Date Written: January 20, 2021
This study examines the effects of the COVID-19 pandemic on sovereign CDS spreads using a large sample of countries. We show how sovereign CDS spreads have widened significantly in response to the COVID-19 pandemic. Based on the most conservative estimate, a 1% increase in COVID-19 infections leads to a 0.17% increase in sovereign CDS spreads. Furthermore, this effect is stronger for developing countries and countries with worse healthcare systems. Government policies partially offset the impact of the COVID-19 pandemic, although these same policies also lead to widening sovereign CDS spreads. Sovereign CDS spreads narrow dramatically several months after the outbreak of the COVID-19 pandemic. Overall, our results suggest that the ongoing COVID-19 pandemic has been a massive shock to the global financial stability.
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