DP13020 Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs?
|Author(s):||Marcos Chamon, Julian Schumacher, Christoph Trebesch|
|Publication Date:||June 2018|
|Keyword(s):||Creditor rights, Law and Finance, seniority, Sovereign debt|
|JEL(s):||F34, G12, K22|
|Programme Areas:||Financial Economics, International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13020|
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.