Contagion of Fear: Is the Impact of COVID-19 on Sovereign Risk Really Indiscriminate?

November 25, 2020

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Serhan Cevik, and Belma Öztürkkal. Contagion of Fear: Is the Impact of COVID-19 on Sovereign Risk Really Indiscriminate?, (USA: International Monetary Fund, 2020) accessed December 3, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper investigates the impact of infectious diseases on the evolution of sovereign credit default swap (CDS) spreads for a panel of 77 advanced and developing countries. Using annual data over the 2004-2020 period, we find that infectious-disease outbreaks have no discernible effect on CDS spreads, after controlling for macroeconomic and institutional factors. However, our granular analysis using high-frequency (daily) data indicates that the COVID-19 pandemic has had a significant impact on market-implied sovereign default risk. This adverse effect appears to be more pronounced in advanced economies, which may reflect the greater severity of the pandemic and depth of the ensuing economic crisis in these countries as well as widespread underreporting in developing countries due to differences in testing availability and institutional capacity. While our analysis also shows that more stringent domestic containment measures help lower sovereign CDS spreads, the macro-fiscal cost of efforts aimed at curbing the spread of the disease could undermine credit worthiness and eventually push the cost of borrowing higher.

Subject: Communicable diseases, COVID-19, Credit default swap, Emerging and frontier financial markets, Financial markets, Health, Money, Oil prices, Prices

Keywords: Buy-and-hold asset return, CDS market, CDS spread, CDS spreads, Communicable diseases, COVID-19, Credit default swap, Debt, Emerging and frontier financial markets, Estimation result, Global, Infectious diseases, Oil prices, Over-the-counter CDS contract, Sovereign CDS, Sovereign credit risk, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/263
Stock No:

WPIEA2020263
ISBN:

9781513561578
ISSN:

1018-5941

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