Foreign Law Bonds: Can They Reduce Sovereign Borrowing Costs?

Julian Schumacher, Marcos Chamon () and Christoph Trebesch

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: The Greek debt restructuring of 2012 showed that the legal terms of sovereign bonds can protect creditors against losses, in particular the type of governing law. This paper studies whether sovereign bonds that are issued in foreign jurisdictions trade at a premium vis-a-vis domestic-law bonds. We use the Eurozone between 2007 and 2014 as a unique testing ground to assess this ``legal safety premium'' and collect secondary market bond yield data for the near-universe of Eurozone government bonds issued in foreign jurisdictions. Controlling for currency risk, liquidity risk, and term structure, we find that foreign-law bonds indeed carry lower yields on average. But a sizable premium only emerges for large values of credit risk (CDS spreads beyond 500bp). At those levels, a 100bp increase in CDS spreads is associated with a 30-80bp larger yield premium on foreign-law bonds. In contrast, we do not find a premium for countries that are perceived as low risk. These results indicate that sovereigns in distress can, at the margin, borrow at lower rates under foreign law.

JEL-codes: F34 G12 G15 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-cba and nep-eec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/113199/1/VfS_2015_pid_874.pdf (application/pdf)

Related works:
Journal Article: Foreign-law bonds: Can they reduce sovereign borrowing costs? (2018)
Journal Article: Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs? (2018)
Working Paper: Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs? (2018)
Working Paper: Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs? (2018)
Working Paper: Foreign-law bonds: can they reduce sovereign borrowing costs? (2018)
Working Paper: Foreign-law bonds: Can they reduce sovereign borrowing costs? (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:113199

Access Statistics for this paper

More papers in VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().