Sovereign debt default risk and Covid-19 - the impact of the Covid-19 pandemic on sovereign default risk and the relevance of fiscal space in developed and developing economies

Abstract

In the first months of the COVID-19 pandemic CDS spreads over the world ramped up. I study how market perception for sovereign debt default (represented by 5- year CDS spreads) evolved depending on the intensity of the economic shock caused by the spread of COVID-19, in developed and developing economies. Using a threshold model, I find a statistically significant relation between the increase in COVID-19 and the increase in CDS spreads for developed economies, with that impact being more than doubled when the country is fiscally constrained. For developing economies, I conclude that the shock in CDS spreads is mostly driven by global-risk factors