In sickness and in debt: The COVID-19 impact on sovereign credit risk

By Patrick Augustin, V. Sokolovski, Marti G. Subrahmanyam, Davide Tomio. Journal of Financial Economics, 2020

132 citations recorded by the source corpus.

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’s 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, impairing their resilience to external shocks.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/a1d988f57ece723f9984f249e259cfbcaf17faf3

Citations in the corpus

• When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response (2020, unknown): “Finally, Gormsen and Koijen (2020) take a more fundamental approach to study the impact of COVID-19 on future growth expectations by studying dividend futures, while Augustin et al. (2020) focus on sovereign credit risk. A broader literature studies how these disruptions arise more generally. First,”