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

Department: Finance

Speaker: Alberto Plazzi (U. Lugano)

Room: T117

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

RUGGERO JAPPELLI, LORIANA PELIZZON AND ALBERTO PLAZZI
August 16, 2024

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 fiscal capacity, 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 public guarantees and defaultable sovereign debt. The model parameters we calibrate from the data confirm that government guarantees in the core were larger than in the periphery, which implies that fiscal capacity buffers provide relief to firms’ financing costs.

JEL classification: F65, G01, G15

Keywords: COVID-19, Credit Risk, Sovereign Risk, Fiscal Capacity, Public Guarantees