Discussion paper

DP13020 Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs?

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.


Chamon, M, J Schumacher and C Trebesch (2018), ‘DP13020 Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs?‘, CEPR Discussion Paper No. 13020. CEPR Press, Paris & London. https://cepr.org/publications/dp13020