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Breakup and default risks in the great lockdown

Author

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  • Bonaccolto, Giovanni
  • Borri, Nicola
  • Consiglio, Andrea

Abstract

In this paper, we exploit CDS quotes for contracts denominated in different currencies and with different default clauses to estimate the risk of a breakup of the Eurozone and the propagation of breakup and default risks after the COVID-19 shock. Our main result is that the risk of a Eurozone breakup is significant although, quantitatively, it is not larger than in the period before the COVID-19 shock. In addition, we find that an increase in the redenomination risk in one country is associated with an increase in default premia and bond spreads in other Eurozone countries. Finally, we find that a sizeable fraction of the changes in the cost of insuring against redenomination and default reflects two additional factors: the first captures the insurance cost against a euro depreciation conditional on redenomination, while the second captures liquidity premia.

Suggested Citation

  • Bonaccolto, Giovanni & Borri, Nicola & Consiglio, Andrea, 2023. "Breakup and default risks in the great lockdown," Journal of Banking & Finance, Elsevier, vol. 147(C).
    • Handle: RePEc:eee:jbfina:v:147:y:2023:i:c:s0378426621002600
    DOI: 10.1016/j.jbankfin.2021.106308
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    More about this item

    Keywords

    Redenomination risk; Default risk; Covar; Elastic net; COVID-19;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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