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

48 Pages Posted: 3 Jul 2018

See all articles by Marcos Chamon

Marcos Chamon

International Monetary Fund (IMF) - Research Department

Julian Schumacher

European Central Bank (ECB)

Christoph Trebesch

Kiel Institute for the World Economy; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: June 2018

Abstract

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 significantly 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

Chamon, Marcos and Schumacher, Julian and Trebesch, Christoph, Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs? (June 2018). CEPR Discussion Paper No. DP13020, Available at SSRN: https://ssrn.com/abstract=3206785

Marcos Chamon (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-5867 (Phone)

Julian Schumacher

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Christoph Trebesch

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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