Journal Article

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


  • Chamon
  • M.
  • Schuhmacher
  • J.
  • Trebesch
  • C.
Publication Date

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.

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JEL Classification
F34, G12, K22

Key Words

  • Creditor Rights
  • Law and Finance
  • Seniority
  • sovereign debt

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