The COVID-19 Pandemic and Sovereign Credit Risk

This study examines the effects of the COVID-19 pandemic on sovereign CDS spreads using a large sample of countries. We 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, our results suggest that the ongoing COVID-19 pandemic has been a massive shock to the global financial stability.