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The Core, the Periphery, and the Disaster: Corporate-Sovereign Nexus in COVID-19 Times

Author

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  • Ruggero Jappelli

    (Goethe University, Frankfurt; Leibniz Institute for Financial Research SAFE)

  • Loriana Pelizzon

    (Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice)

  • Alberto Plazzi

    (Swiss Finance Institute; Universita' della Svizzera italiana)

Abstract
We study how the COVID-19 pandemic reshaped the relation between corporate and sovereign credit risk in the cross-section of countries in the European Union. Surprisingly, the outbreak triggered higher elasticity of corporate to sovereign CDS spreads in core countries, which realigned to that of peripheral countries, with lower fiscal capacity, for which the impact of the pandemic on the elasticity was essentially muted. During the pandemic, we observe systematic departures of actual CDS from those implied by a standard structural model of default for larger firms in core EU countries with budgetary slackness. We interpret this evidence in light of a disaster-risk asset pricing model with bailout guarantees and defaultable public debt. Based on the model and a synthetic control method, we show that CDS-implied risk-adjusted bailout guarantees over the medium term were about three times larger in the Core than in the Periphery.

Suggested Citation

  • Ruggero Jappelli & Loriana Pelizzon & Alberto Plazzi, 2021. "The Core, the Periphery, and the Disaster: Corporate-Sovereign Nexus in COVID-19 Times," Swiss Finance Institute Research Paper Series 21-30, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2130
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    4. Segura, Anatoli & Villacorta, Alonso, 2023. "Firm-bank linkages and optimal policies after a rare disaster," Journal of Financial Economics, Elsevier, vol. 149(2), pages 296-322.

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    More about this item

    Keywords

    COVID-19; Credit Risk; Sovereign Risk; Fiscal Capacity; Bailout;
    All these keywords.

    JEL classification:

    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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