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

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  • Augustin, Patrick
  • Sokolovski, Valeri
  • Subrahmanyam, Marti G.
  • Tomio, Davide

Abstract

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.

Suggested Citation

  • Augustin, Patrick & Sokolovski, Valeri & Subrahmanyam, Marti G. & Tomio, Davide, 2022. "In sickness and in debt: The COVID-19 impact on sovereign credit risk," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1251-1274.
    • Handle: RePEc:eee:jfinec:v:143:y:2022:i:3:p:1251-1274
    DOI: 10.1016/j.jfineco.2021.05.009
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    More about this item

    Keywords

    COVID-19; Coronavirus; Sovereign credit risk; Debt; Fiscal capacity;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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