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Covid 19: a new challenge for the EMU

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  • Anne-Laure Delatte
  • Alexis Guillaume

Abstract

Although the pandemic was an exogenous shock, it triggered portfolio rebalancing in the Euro Area (EA) implying a divergence of sovereign risk premia in the first phase of the crisis eventually followed by a narrowing of the spreads. We estimate the determinants of sovereign bond spreads in the EA during the pandemic from January 2 2020 to May 25 2020. We find that: 1) the countries’ resilience to the COVID shock depended on healthcare capacity, the strength of the banking sector and the fiscal outlook; 2) during the crisis, ECB speeches were a game changer and made a much greater contribution than securities purchase programs; 3) coordination by the European Council also helped to reduce the spreads but the effect was partly offset by loan-based financial assistance programs

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  • Anne-Laure Delatte & Alexis Guillaume, 2020. "Covid 19: a new challenge for the EMU," Working Papers 2020-08, CEPII research center.
    • Handle: RePEc:cii:cepidt:2020-08
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    1. repec:hal:journl:hal-03219581 is not listed on IDEAS
    2. Didier, Tatiana & Huneeus, Federico & Larrain, Mauricio & Schmukler, Sergio L., 2021. "Financing firms in hibernation during the COVID-19 pandemic," Journal of Financial Stability, Elsevier, vol. 53(C).
    3. Fendel, Ralf & Neugebauer, Frederik & Zimmermann, Lilli, 2021. "Reactions of euro area government yields to Covid-19 related policy measure announcements by the European Commission and the European Central Bank," Finance Research Letters, Elsevier, vol. 42(C).
    4. Ortmans, Aymeric & Tripier, Fabien, 2021. "COVID-induced sovereign risk in the euro area: When did the ECB stop the spread?," European Economic Review, Elsevier, vol. 137(C).
    5. Peter A.G. van Bergeijk, 2021. "Pandemic Economics," Books, Edward Elgar Publishing, number 20401.
    6. Gergely Hudecz & Elisabetta Vangelista & Robert Blotevogel, 2022. "Asset purchases and sovereign risk premia in the euro area during the pandemic," Working Papers 55, European Stability Mechanism, revised 12 Sep 2022.
    7. Havlik, Annika & Heinemann, Friedrich & Helbig, Samuel & Nover, Justus, 2022. "Dispelling the shadow of fiscal dominance? Fiscal and monetary announcement effects for euro area sovereign spreads in the corona pandemic," Journal of International Money and Finance, Elsevier, vol. 122(C).
    8. Borgioli, Stefano & Kochanska, Urszula & Mongelli, Francesco Paolo & Zito, Alessandro, 2023. "A novel high‐frequency indicator of financial integration for monitoring the impact of COVID-19," Statistics Paper Series 43, European Central Bank.
    9. Sanjay Kumar Rout & Hrushikesh Mallick, 2022. "Sovereign Bond Market Shock Spillover Over Different Maturities: A Journey from Normal to Covid-19 Period," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 29(4), pages 697-734, December.
    10. Aymeric Ortmans & Fabien Tripier, 2020. "COVID-Induced Sovereign Risk in the Euro Area: When Did the ECB Stop the Contagion?," Working Papers 2020-11, CEPII research center.

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    More about this item

    Keywords

    Sovereign Risk; European Monetary Union; Covid; Public Policy;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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