Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/247667 
Year of Publication: 
2021
Series/Report no.: 
SAFE Working Paper No. 331
Publisher: 
Leibniz Institute for Financial Research SAFE, Frankfurt a. M.
Abstract: 
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.
Subjects: 
COVID-19
Credit Risk
Sovereign Risk
Fiscal Capacity
Bailout
JEL: 
F65
G01
G15
Document Type: 
Working Paper

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