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COVID-Induced Sovereign Risk in the Euro Area: When Did the ECB Stop the Contagion?

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  • Aymeric Ortmans
  • Fabien Tripier

Abstract

This paper studies how the announcement of the ECB’s monetary policies stopped the spread of the COVID-19 pandemic to the European sovereign debt market. We show that up to March 9, the occurrence of new cases in euro area countries had a sizeable and persistent effect on 10-year sovereign bond spreads relative to Germany: 10 new confirmed cases per million people were accompanied by an immediate spread increase of 0.03 percentage points (ppt) that lasted 5 days, for a total increase of 0.35 ppt. For periods afterwards,the effect falls to near zero and is not significant. We interpret this change as an indicator of the success of the ECB’s March 12 press conference, despite the “we are not here to close spreads” controversy. Our results hold for the stock market, providing further evidence of the effectiveness of the ECB’s March 12 announcements in stopping the financial turmoil. A counterfactual analysis shows that without the shift in the sensitivity of sovereign bond markets to COVID-19, spreads would have surged to 4.2% in France, 12.5% in Spain, and 19.5% in Italy by March 18, when the ECB’s Pandemic Emergency Purchase Programme was finally announced.

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  • Aymeric Ortmans & Fabien Tripier, 2020. "COVID-Induced Sovereign Risk in the Euro Area: When Did the ECB Stop the Contagion?," Working Papers 2020-11, CEPII research center.
    • Handle: RePEc:cii:cepidt:2020-11
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    Cited by:

    1. Willem THORBECKE, 2021. "Understanding the Transmission of COVID-19 News to French Financial Markets," Discussion papers 21037, Research Institute of Economy, Trade and Industry (RIETI).
    2. Stéphanie Pamies & Nicolas Carnot & Anda Pătărău, 2021. "Do Fundamentals Explain Differences between Euro Area Sovereign Interest Rates?," European Economy - Discussion Papers 141, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

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    More about this item

    Keywords

    COVID-19; European Central Bank; Sovereign debt; Monetary policy; Local projections;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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