CEPII, Recherche et Expertise sur l'economie mondiale
COVID-Induced Sovereign Risk in the Euro Area: When Did the ECB Stop the Contagion?


Aymeric Ortmans
Fabien Tripier

 Highlights :
  • How ECB's monetary policy interventions have eliminated European sovereign risk induced by the COVID-19 pandemic outbreak?
  • Up to March 9, the occurrence of 1000 new COVID-19 cases is accompanied by an immediate and persistent increase in the 10-years sovereign bond spreads, reaching 0.54 percentage point in 5 days.
  • Evidence suggests that the ECB's press conference on March 12 has stopped the COVID-19 contagion in sovereign debt markets despite the "we are not here to close spreads" controversy.
  • A counterfactual shows that without the shift in the sensitivity of sovereign bond markets to COVID-19, spreads would have surged to 4.4% in France, 9.6% in Spain, and 19.2% in Italy as early as March 18.

 Abstract :
This paper studies how the announcement of ECB’s monetary policies has stopped the contagion of the COVID-19 pandemic in the European sovereign debt markets. We show that up to March 9, the occurence of new cases in euro area countries has a sizeable and persistent effect on 10-years sovereign bond spreads relative to Germany: the occurrence of 1000 new cases is accompanied by an immediate increase in the spread which lasts 5 days after, reaching an increase of 0.54 percentage point. Afterwards, the effect is close to zero and not significant. We interpret this change as a successful outcome of the ECB’s press conference on March 12 despite the ”we are not here to close spreads” controversy. Indeed, a counterfactual shows that without this shift in the sensitivity of sovereign bond markets to COVID-19, spreads would have surged to 4.4% in France, 9.6% in Spain, and 19.2% in Italy as early as March 18, when the ECB’s Pandemic Emergency Purchase Programme has finally been announced.

 Keywords : COVID-19 | European Central Bank | Sovereign debt | Monetary policy | Local projections

 JEL : E52, E58, E65, H63
CEPII Working Paper
N°2020-11, October 2020

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