The core, the periphery, and the disaster: corporate-sovereign nexus in COVID-19 times

  • 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.

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Author:Ruggero Jappelli, Loriana PelizzonORCiDGND, Alberto PlazziORCiD
Parent Title (English):SAFE working paper ; No. 331
Series (Serial Number):SAFE working paper series (331)
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2021
Year of first Publication:2021
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2021/12/20
Tag:Bailout; COVID-19; Credit Risk; Fiscal Capacity; Sovereign Risk
Issue:October 20, 2021
Page Number:63
This preprint research paper has not been peer reviewed.
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht