The Core, the Periphery, and the Disaster: Corporate-Sovereign Nexus in COVID-19 Times

62 Pages Posted: 14 Apr 2021 Last revised: 4 Oct 2021

See all articles by Ruggero Jappelli

Ruggero Jappelli

Goethe University, Frankfurt; Leibniz Institute for Financial Research SAFE

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice

Alberto Plazzi

affiliation not provided to SSRN; Universita' della Svizzera italiana; Swiss Finance Institute

Date Written: April 9, 2021

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

JEL Classification: F65, G01, G15

Suggested Citation

Jappelli, Ruggero and Pelizzon, Loriana and Pelizzon, Loriana and Plazzi, Alberto and Plazzi, Alberto, The Core, the Periphery, and the Disaster: Corporate-Sovereign Nexus in COVID-19 Times (April 9, 2021). Swiss Finance Institute Research Paper No. 21-30, Available at SSRN: https://ssrn.com/abstract=3823385 or http://dx.doi.org/10.2139/ssrn.3823385

Ruggero Jappelli

Goethe University, Frankfurt ( email )

Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Alberto Plazzi (Contact Author)

affiliation not provided to SSRN

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Universita' della Svizzera italiana ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

HOME PAGE: http://usi.to/mpy

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