The Core, the Periphery, and the Disaster: Corporate-Sovereign Nexus in Covid Times

We study how the COVID-19 pandemic reshaped relation between corporate and sovereign credit risk in cross-section of countries European Union. Surprisingly, outbreak triggered higher elasticity to CDS spreads core countries, which realigned that peripheral with lower fiscal capacity, for impact on was essentially muted. During pandemic, we observe systematic departures actual from those implied by a standard structural model default larger firms EU budgetary slackness. interpret this evidence light disaster-risk asset pricing bailout guarantees defaultable public debt. Based synthetic control method, show CDS-implied risk-adjusted over medium term were about three times Core than Periphery.