The Effects of the COVID-19 Pandemic Through the Lens of the CDS Spreads

Alin Marius Andrieș,Nicu Sprincean,Steven Ongena

doi:10.30687/978-88-6969-442-4/006

Abstract

In this paper we are analysing the impact of the general lockdown measures imposed in Italy in the context of the COVID-19 pandemic on European banks’ CDS spreads. Compared to the impact of the COVID-19 pandemic on sovereign risk, we find little evidence of increased bank risk following the event. However, investors’ reaction was clearly negative in longer time frames. In addition, we quantify the feedback loop between sovereign and bank risk and document an increased interconnectedness between sovereigns and banks during the current health crisis, however with a smaller magnitude comparing to the sovereign debt crisis. Banks are now more resilient to shocks, being a direct consequence of the post-crisis regulatory framework.

Highlights

Monica BillioUniversità Ca’ Foscari Venezia, Italia Simone VarottoICMA Centre, Henley Business School, University of Reading, UKPandemics are disruptive events that have profound consequences for society and the economy
This paper investigates how monetary policy announcements by the European Central Bank (ECB) and its quantitative easing announcements affected European repo rates during the COVID-19 crisis
Instead of alleviating market tensions, the economic outlook and the statement of the ECB President during the Q&A emphasising that the “ECB is not there to close spreads” reawakened concerns regarding the ability of peripheral countries struggling to tackle the virus to cope with increased debt issuance

Summary

Introduction

Pandemics are disruptive events that have profound consequences for society and the economy This volume aims to present an analysis of the economic impact of COVID-19 and its likely consequences for our future. We asked contributing authors to write their chapters for a non-technical audience so that their message could reach beyond academia and professional economists to policy makers and the wider society. The material in this volume draws from the latest research and provides a wealth of ideas for further investigations and opportunities for reflection. In only one case did politicians reject this advice, in the special circumstances of an electorate who had learned the lessons of the government response to the First World War aftermath and took the opportunity of the 1945 election to vote in a radical government, committed to social reconstruction and the welfare state

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Conclusion