Citation

Discussion Paper Details

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Full Details

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

Author(s): Marcos Chamon, Julian Schumacher and Christoph Trebesch

Publication Date: June 2018

Keyword(s): Creditor rights, Law and Finance, seniority and Sovereign debt

Programme Area(s): Financial Economics and International Macroeconomics and Finance

Abstract: Governments often issue bonds in foreign jurisdictions, which can provide additional legal protection vis-�-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.

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Bibliographic Reference

Chamon, M, Schumacher, J and Trebesch, C. 2018. 'Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13020