Contagion of Fear: Is the Impact of COVID-19 on Sovereign Risk Really Indiscriminate?

23 Pages Posted: 26 Jan 2021

See all articles by Serhan Cevik

Serhan Cevik

International Monetary Fund (IMF)

Belma Ozturkkal

Kadir Has University Istanbul, Turkey

Date Written: November 1, 2020

Abstract

This paper investigates the impact of infectious diseases on the evolution of sovereign credit default swap (CDS) spreads for a panel of 77 advanced and developing countries. Using annual data over the 2004-2020 period, we find that infectious-disease outbreaks have no discernible effect on CDS spreads, after controlling for macroeconomic and institutional factors. However, our granular analysis using high-frequency (daily) data indicates that the COVID-19 pandemic has had a significant impact on market-implied sovereign default risk. This adverse effect appears to be more pronounced in advanced economies, which may reflect the greater severity of the pandemic and depth of the ensuing economic crisis in these countries as well as widespread underreporting in developing countries due to differences in testing availability and institutional capacity. While our analysis also shows that more stringent domestic containment measures help lower sovereign CDS spreads, the macro-fiscal cost of efforts aimed at curbing the spread of the disease could undermine credit worthiness and eventually push the cost of borrowing higher.

JEL Classification: F34, G13, G15, E50, I12, Q41, G10

Suggested Citation

Cevik, Serhan and Ozturkkal, Belma, Contagion of Fear: Is the Impact of COVID-19 on Sovereign Risk Really Indiscriminate? (November 1, 2020). IMF Working Paper No. 2020/263, Available at SSRN: https://ssrn.com/abstract=3772467

Serhan Cevik (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Belma Ozturkkal

Kadir Has University Istanbul, Turkey ( email )

Kadir Has Caddesi Cibali
Istanbul
Turkey
+90 212 533 5765 (Phone)

HOME PAGE: http://https://mgmt.khas.edu.tr/en/academic/2008

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