In Sickness and in Debt: The COVID-19 Impact on Sovereign Credit Risk?

News

Published: 9Feb2021

Authors: Patrick Augustin, V. Sokolovski, M.G. Subrahmanyam, and D. Tomio

Publication: Journal of Financial Economics, Forthcoming

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' 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, thereby impairing their resilience to external shocks.


Desautels 22

In recognition of research excellence as it relates to publications in top-tier management journals, our Faculty has compiled a list of high quality, peer-reviewed management journals, which is referred to as the Desautels 22.

Editor feedback

For more information or if you would like to report an error, please web.desautels [at] mcgill.ca (subject: Website%20News%20Comments) (contact us).

Coronavirus (COVID-19)

For the latest information on McGill University's response to COVID-19, please visit the Coronavirus Information website.

For Desautels specific updates please visit our COVID-19 FAQ page.

Back to top