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.

Bonaccolto G., Borri N., Consiglio A. (2023). Breakup and default risks in the great lockdown. JOURNAL OF BANKING & FINANCE, 147, 1-15 [10.1016/j.jbankfin.2021.106308].

Breakup and default risks in the great lockdown

Consiglio A.
Conceptualization
2023-02-01

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.
feb-2023
Bonaccolto G., Borri N., Consiglio A. (2023). Breakup and default risks in the great lockdown. JOURNAL OF BANKING & FINANCE, 147, 1-15 [10.1016/j.jbankfin.2021.106308].
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10447/520238
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