Fig. 5.

Elasticity of sovereign credit risk to COVID-19 infections. This figure shows the sensitivity of percentage changes in sovereign CDS spreads to percentage changes in the number of COVID-19 cases for each country in our sample of 30 developed economies. The sensitivity parameters are calculated based on the regression analysis reported in column (1) of Table 5, and are a function of a country’s fiscal capacity. Together with the incidences of COVID-19 infections and their interaction with the country’s fiscal capacity, the regression includes local and global risk factors, such as the return of the country’s major stock market index, foreign exchange rate return, the return of the S&P 500, and the corresponding volatility index. The superscripts ${}^{*}$, ${}^{**}$, and ${}^{***}$ refer to statistical significance at the $10\%$, $5\%$, and $1\%$ levels, respectively. Statistical significance is calculated based on the estimate of a Wald-test from a variance-covariance matrix that is two-way clustered at the country- and day-level. Data on CDS spreads are obtained from Markit. COVID-19 data are from the European Centre for Disease Prevention and Control. Fiscal space indicators are obtained from the IMF, the OECD, and the World Bank.