Breakup and Default Risks in the Great Lockdown

Since the burst of the sovereign debt crisis, investors perceive the concrete possibility of a breakup of the Eurozone. We exploit CDS quotes for contracts denominated in different currencies and with different default clauses to estimate the network of breakup and default risk spillovers in the Eurozone isolating the relevant factors with regularization techniques. Our main result is that redenomination shocks to France and Italy have economically large spillovers. However, while redenomination shocks to France increase the risk of a breakup of the Eurozone, redenomination shocks to Italy increase the risk of sovereign defaults, like sovereign debt restructurings.