The COVID-19 pandemic, consumption and sovereign credit risk: Cross-country evidence

Abstract

Many recent studies investigate the economic effect of the COVID-19 pandemic in multiple aspects, while whether and how the sovereign credit risk reacts to the shock is still underexplored. Using a sample of forty developed and developing countries and employing staggered difference-in-differences models, we find that the sovereign credit risk measured by sovereign credit default swap spreads significantly increases after the COVID-19 pandemic outbreak, and the adverse effect is more pronounced for short-term credit risk. The reason is that the pandemic causes severe concerns about aggregate consumption contraction in addition to the fiscal capacity and the volatility of exports. We also find that fiscal stimuli stabilizing consumer spending alleviate the adverse effect of the COVID-19 pandemic, while debt relief does not matter. Overall, practitioners and policy makers should attach more importance to consumption and its recovery during the pandemic when making decisions.