Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs?

Governments often issue bonds in foreign jurisdictions, which can provide additional legal protection vis-à-vis domestic bonds. This paper studies the effect of this jurisdiction choice on bond prices. We test whether foreign-law bonds trade at a premium compared to domestic-law bonds. We use the euro area 2006-2013 as a unique testing ground, controlling for currency risk, liquidity risk, and term structure. Foreign-law bonds indeed carry signicantly lower yields in distress periods, and this effect rises as the risk of a sovereign default increases. These results indicate that, in times of crisis, governments can borrow at lower rates under foreign law.

Keywords: Sovereign Debt, Creditor Rights, Seniority, Law and Finance

JEL Classification: F34, G12, K22

Suggested Citation: Suggested Citation

Chamon, Marcos and Schumacher, Julian and Trebesch, Christoph, Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs? (June 20, 2018). ECB Working Paper No. 2162, Available at SSRN: https://ssrn.com/abstract=3200256 or http://dx.doi.org/10.2139/ssrn.3200256