When Governments Promise to Prioritize Public Debt: Do Markets Care?

45 Pages Posted: 15 Apr 2019

See all articles by G. Mitu Gulati

G. Mitu Gulati

Duke University School of Law

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics

Mark C. Weidemaier

University of North Carolina School of Law

Grace Willingham

Duke University, School of Law, Students

Date Written: April 13, 2019

Abstract

During the European sovereign debt crisis of 2011-13, some nations faced with rising borrowing costs adopted commitments to treat bondholders as priority claimants. That is, if there was a shortage of funds, bondholders would be paid first. In this article, we analyze the prevalence and variety of these types of commitments and ask whether they impact borrowing costs. We examine a widely-touted reform at the height of the Euro sovereign debt crisis in 2011, in which Spain enshrined in its constitution a strong commitment to give absolute priority to public debt claimants. We find no evidence that this reform had any impact on Spanish sovereign bond yields. By contrast, our examination of the U.S. Commonwealth of Puerto Rico suggests that constitutional priority promises can have an impact, at least where the borrower government is subject to supervening law and legal institutions.

Keywords: Sovereign Debt, Debt Sustainability, Sovereign Spreads

JEL Classification: E62, H62, H63, P16

Suggested Citation

Gulati, Gaurang Mitu and Panizza, Ugo and Weidemaier, Mark C. and Willingham, Grace, When Governments Promise to Prioritize Public Debt: Do Markets Care? (April 13, 2019). Duke Law School Public Law & Legal Theory Series No. 2019-31. Available at SSRN: https://ssrn.com/abstract=3371492 or http://dx.doi.org/10.2139/ssrn.3371492

Gaurang Mitu Gulati

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland

Mark C. Weidemaier (Contact Author)

University of North Carolina School of Law ( email )

Van Hecke-Wettach Hall, 160 Ridge Road
CB #3380
Chapel Hill, NC 27599-3380
United States
919.843.4373 (Phone)

Grace Willingham

Duke University, School of Law, Students ( email )

Durham, NC
United States

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