Assessment of the credit risk of Poland based on sovereign credit default swap spreads during the Covid-19 pandemic
DOI:
https://doi.org/10.12775/EiP.2021.030Keywords
credit default swap, credit risk, sovereign default, Covid-19 pandemicAbstract
Motivation: SCDS contracts, based on treasury bonds, are used to assess credit risk. Observation of changes in these instruments provides information on the current economic situation of individual countries. By correlating them with the economic assessment of individual countries, SCDS indicate the risk level of bankruptcy of a given country and thus play an informative role on the global financial market.
Aim: The objective of the study is to investigate the impact of the Covid-19 pandemic on the level of credit risk in Poland. This aim will be achieved by determining the level and the dynamics of changes of SCDS spreads, and by identifying the determinants of changes in the level of SCDS spreads before and after the pandemic. The study hypothesises that as a result of the supply and demand shocks caused by the outbreak of the Covid-19, the level of Polish SCDS spreads increased due to macroeconomic factors.
Results: The results of the study confirmed that due to the panic, Poland’s credit risk increased dynamically in the first stage of the Covid-19. However, over time, the level of credit risk in Poland decreased. Nevertheless, the reduction in Poland’s credit risk is accompanied by an increase in public debt, with a simultaneous deterioration in macroeconomic indicators. This evidence suggests that SCDS spreads are not capable of reflecting the foundations of the economy during uncertainty. The results of this study indicate that the fundamental determinants of credit risk changes occurred before and during the pandemic. However, the results showed that the magnitude of their impact on credit risk is different. Multiple linear regression analysis also showed that during the Covid-19, macroeconomic factors showed a significantly higher degree of correlation with credit risk compared to non-economic factors directly related to the effects of the pandemic.
References
Ait-Sahalia, Y., Laeven, R., & Pelizzon, L. (2014 ). Mutual excitation in Eurozone sovereign CDS. Journal of Econometrics, 183(2), 151–167. https://doi.org/10.1016/j.jeconom.2014.05.006.
Aizenman, J., Hutchison, M., & Jinjarak, Y. (2013). What is the risk of European sovereign debt default. Journal of International Money and Finance, 34, 37–59. https://doi.org/10.1016/j.jimonfin.2012.11.011.
Alper, E., Forni, L., & Gererd, M. (2013). Pricing of sovereign credit risk: evidence from advanced economies during the financial crisis. International Finance, 16(2), 161–188. https://doi.org/10.1111/j.1468-2362.2013.12028.x.
AssetMacro. (2021). Poland CDS historical prices. Retrieved 09.10.2021 from https://www.assetmacro.com/poland/credit-default-swaps-cds/poland-cds.
Camba-Méndeza, G., & Serwa, D. (2016). Market perception of sovereign credit risk in the euro area during the financial crisis. The North American Journal of Economics and Finance, 37, 168–189. https://doi.org/10.1016/j.najef.2016.04.002.
Czech, M. (2019). Credit default swap w transakcjach średnioterminowych na globalnym rynku finansowym. Difin.
Dieckmann, S., & Plank, T. (2012). Default risk of advanced economies: an empirical analysis of credit. Review of Finance, 16(4), 903–934. https://doi.org/10.1093/rof/rfr015.
Eichengreen, B., Mody, A., Nedeljkovic, M., & Sarno, L. (2012). How the subprime crisis went global: evidence from bank credit default swap spreads. Journal of International Money and Finance, 31(5), 1299–1318. https://doi.org/10.1016/j.jimonfin.2012.02.002.
Ericsson, J., Jacobs, K., & Oviedo, R. (2009). The determinants of credit default swap premia. The Journal of Financial and Quantitative Analysis, 44(1), 109–132. https://doi.org/10.2139/ssrn.601082.
Fontana, A., & Scheicher, M. (2016). An analysis of euro area sovereign CDS and their relation with government bonds. Journal of Banking & Finance, 62, 126–140. https://doi.org/10.1016/j.jbankfin.2015.10.010.
Grodzicki, M. (2012). Kredytowe instrumenty pochodne w dobie kryzysu finansowego. In W. Przybylska-Kapuścińska (Ed.), Instrumenty pochodne w globalnej gospodarce (pp. 49–66). NBP.
Heinz, F.F., & Sun, Y.M. (2014). Sovereign CDS spreads in Europe: the role of global risk aversion, economic fundamentals, liquidity, and spillovers. IMF Working Papers, 14(17), 1–77. https://doi.org/10.5089/9781484393017.001.
Kliber, A. (2019). The sovereign credit default swap market: is there anything to be afraid of: a comparison of selected Central and Western European Economies. Argumenta Oeconomica, 2(43), 137–167. https://doi.org/10.15611/aoe.2019.2.06.
Kocsis, Z. (2015). Global, regional, and country-specific components of financial market indicators. Acta Oeconomica, 64(S1), 81–110. https://doi.org/10.1556/AOecon.64.2014.S1.3.
Liu, Y., & Morley, B. (2012). Sovereign credit default swaps and the macroeconomy. Applied Economics, 19(2), 129–132. https://doi.org/10.1080/13504851.2011.568390.
Longstaff, F.A., Pan, J., Pedersen, L.H., & Singleton, K.J. (2011). How sovereign is sovereign credit risk. American Economic Journal: Macroeconomics, 3(2), 75–103. https://doi.org/10.1257/mac.3.2.75.
Ma, J.Z., Deng, X., Ho, K.-C., & Tsai, S.-B. (2018). Regime-switching determinants for spreads of emerging markets sovereign credit default swaps. Sustainability, 10(8), 2730. https://doi.org/10.3390/su10082730.
Ministry of Finance. (2021). Szeregi czasowe. Retrieved 09.10.2021 from https://www.gov.pl/web/finanse/szeregiczasowe.
Norman, J. Bar-Yam, Y., & Taleb, N.N. (2020). Systemic risk of pandemic via novel pathogens: coronavirus: a note. Retrieved 09.10.2021 from https://necsi.edu/s/Systemic_Risk_of_Pandemic_via_Novel_Path.pdf.
Piotrowski, D., & Piotrowska, A. (2013). Notowania CDS a dostęp do kapitału w okresie kryzysu finansów publicznych. Zeszyty Naukowe Uniwersytetu Szczecińskiego: Rynki Finansowe, Ubezpieczenia, 63, 391–405.
Qian, Z., Wang, W., & Ji, K. (2017). Sovereign credit risk, macroeconomic dynamics, and financial contagion: evidence from Japan. Macroeconomic Dynamics, 21(8), 2096–2120. https://doi.org/10.1017/s1365100516000122.
Yin, C., Chiu, J., Hsiao, Y.-J., & Tsai, W.-C. (2021). The effects of us macroeconomic surprises on the term structure of emerging-market sovereign credit default swaps. SSRN Electronic Journal, 1–54. https://doi.org/10.2139/ssrn.3759530.
Yuan, C., & Pongsiri, T.J. (2015). Fiscal austerity, growth prospects, and sovereign CDS spreads: the Eurozone and beyond. International Economics, 141, 50–79.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2022 Maria Czech
![Creative Commons License](http://i.creativecommons.org/l/by-nd/4.0/88x31.png)
This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.
Stats
Number of views and downloads: 617
Number of citations: 0