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Foreign-law bonds: can they reduce sovereign borrowing costs?

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  • Chamon, Marcos
  • Schumacher, Julian
  • Trebesch, Christoph

Abstract

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 a 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. JEL Classification: F34, G12, K22

Suggested Citation

  • Chamon, Marcos & Schumacher, Julian & Trebesch, Christoph, 2018. "Foreign-law bonds: can they reduce sovereign borrowing costs?," Working Paper Series 2162, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20182162
    Note: 2604030
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    Cited by:

    1. Enderlein, Henrik & Schumacher, Julian & Trebesch, Christoph, 2018. "Sovereign Defaults in Court," CEPR Discussion Papers 12777, C.E.P.R. Discussion Papers.
    2. Chamon, Marcos & Schumacher, Julian & Trebesch, Christoph, 2018. "Foreign-law bonds: Can they reduce sovereign borrowing costs?," Journal of International Economics, Elsevier, vol. 114(C), pages 164-179.
    3. Rischen, Tobias & Theissen, Erik, 2018. "Underpricing in the euro area corporate bond market: New evidence from post-crisis regulation and quantitative easing," CFR Working Papers 18-03, University of Cologne, Centre for Financial Research (CFR).
    4. Christophe Destais & Frederik Eidam & Friedrich Heinemann, 2019. "The design of a sovereign debt restructuring mechanism for the euro area: Choices and trade-offs," CEPII Policy Brief 2019-25, CEPII research center.
    5. Christian Bayer & Chi Hyun Kim & Alexander Kriwoluzky, 2018. "The Term Structure of Redenomination Risk," Discussion Papers of DIW Berlin 1740, DIW Berlin, German Institute for Economic Research.
    6. Otto Randl & Josef Zechner, 2018. "Sovereign Reputation and Yield Spreads: A Case Study on Retroactive Legislation," German Economic Review, Verein für Socialpolitik, vol. 19(3), pages 260-279, August.
    7. Fang, Chuck & Schumacher, Julian & Trebesch, Christoph, 2021. "Restructuring sovereign bonds: Holdouts, haircuts and the effectiveness of CACs," Kiel Working Papers 2175, Kiel Institute for the World Economy (IfW).
    8. Kobielarz, Michal, 2018. "The economics of monetary unions," Other publications TiSEM b0293536-68ec-4905-bffd-6, Tilburg University, School of Economics and Management.
    9. Eijffinger, Sylvester C.W. & Kobielarz, Michał L. & Uras, Burak R., 2018. "Sovereign default, exit and contagion in a monetary union," Journal of International Economics, Elsevier, vol. 113(C), pages 1-19.
    10. Nicoletta Layher & Eyden Samunderu, 2020. "The Impact of the Introduction of Uniform European Collective Action Clauses on European Government Bonds as a Regulatory Result of the European Sovereign Debt Crisis," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 14(1), pages 1-32, December.
    11. Kriwoluzky, Alexander & Müller, Gernot J. & Wolf, Martin, 2019. "Exit expectations and debt crises in currency unions," Journal of International Economics, Elsevier, vol. 121(C).
    12. Jakob Korbinian Eberl, 2016. "The Collateral Framework of the Eurosystem and Its Fiscal Implications," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 69, November.
    13. Trebesch, Christoph, 2015. "Kurzgutachten zu Staatsschuldenkrisen," Working Papers 06/2015, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    14. Eidam, Frederik, 2016. "An analysis of euro area bond maturities and simulation of the introduction of new CACs," Working Papers 11/2016, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    15. Elisabeth de Fontenay & Josefin Meyer & Mitu Gulati, 2019. "The sovereign debt listing puzzle," Oxford Economic Papers, Oxford University Press, vol. 71(2), pages 472-495.

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    More about this item

    Keywords

    creditor rights; law and finance; seniority; sovereign debt;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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