Open AccessThe COVID-19 pandemic and sovereign credit risk
Author(s) -
WeiFong Pan,
Xinjie Wang,
Wentong Ge,
Weike Xu
Publication year - 2021
Publication title -
china finance review international
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.549
H-Index - 9
eISSN - 2044-1401
pISSN - 2044-1398
DOI - 10.1108/cfri-01-2021-0010
Subject(s) - pandemic , covid-19 , business , sovereignty , credit default swap , sovereign default , credit risk , economics , monetary economics , panel data , government (linguistics) , medicine , actuarial science , sovereign debt , political science , disease , econometrics , politics , infectious disease (medical specialty) , linguistics , philosophy , law
Purpose The purpose of this study is to examine the effects of the coronavirus disease 2019 (COVID-19) pandemic on sovereign credit default swap (CDS) spreads using a large sample of countries. Design/methodology/approach In this paper, the authors use a wide set of the sovereign CDS data of 78 countries. To measure the magnitude of the COVID-19 pandemic, the authors use the daily change of confirmed cases collected from Our World in Data. They use panel regressions to estimate the impact of the COVID-19 pandemic on sovereign credit risk. Findings The authors show how sovereign CDS spreads have widened significantly in response to the COVID-19 pandemic. Based on the most conservative estimate, a 1% increase in COVID-19 infections leads to a 0.17% increase in sovereign CDS spreads. Furthermore, this effect is stronger for developing countries and countries with worse healthcare systems. Government policies partially offset the impact of the COVID-19 pandemic, although these same policies also lead to widening sovereign CDS spreads. Sovereign CDS spreads narrow dramatically several months after the outbreak of the COVID-19 pandemic. Overall, the results suggest that the ongoing COVID-19 pandemic has been a massive shock to the global financial stability. Originality/value This paper provides new evidence that COVID-19 widens sovereign CDS spreads. The authors further show that this widening effect is felt most strongly in developing economies.