The Core, the Periphery, and the Disaster: Corporate-Sovereign Nexus in COVID-19 Times
68 Pages Posted: 14 Dec 2021 Last revised: 15 Mar 2022
Date Written: March 14, 2022
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: Suggested Citation