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.