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Working paper
Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs?
In: CEPR Discussion Paper No. DP13020
SSRN
Working paper
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.
BASE
Going to Extremes: Politics after Financial Crisis, 1870-2014
Partisan conflict and policy uncertainty are frequently invoked as factors contributing to slow post-crisis recoveries. Recent events in Europe provide ample evidence that the political aftershocks of financial crises can be severe. In this paper we study the political fall-out from systemic financial crises over the past 140 years. We construct a new long-run dataset covering 20 advanced economies and more than 800 general elections. Our key finding is that policy uncertainty rises strongly after financial crises as government majorities shrink and polarization rises. After a crisis, voters seem to be particularly attracted to the political rhetoric of the extreme right, which often attributes blame to minorities or foreigners. On average, far-right parties increase their vote share by 30% after a financial crisis. Importantly, we do not observe similar political dynamics in normal recessions or after severe macroeconomic shocks that are not financial in nature.
BASE
Foreign Law Bonds: Can They Reduce Sovereign Borrowing Costs?
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.
BASE
Going to Extremes: Politics after Financial Crises, 1870-2014
In: CESifo Working Paper Series No. 5553
SSRN
Working paper
Going to Extremes: Politics after Financial Crises, 1870-2014
In: CEPR Discussion Paper No. DP10884
SSRN
Working paper
What Explains Sovereign Debt Litigation?
We study the occurrence of holdout litigation in the context of sovereign defaults. The number of creditor lawsuits against foreign governments has strongly increased over the past decades, but there is a large variation across crisis events. Why are some defaults followed by a "run to the courthouse" and others not? What explains the general increase in lawsuits? We address these questions based on an economic model of litigation and a new dataset capturing the near-universe of cases filed against defaulting sovereigns. We find that creditors are more likely to litigate in large debt restructurings, when governments impose high losses ("haircuts"), and when the defaulting country is more vulnerable to litigation (open economies and those with a low legal capacity). We conclude that sovereign debt lawsuits can be predicted reasonably well with a simple framework from the law and economics literature.
BASE
What Explains Sovereign Debt Litigation?
In: CESifo Working Paper Series No. 5319
SSRN
Working paper
Schuldenkrisen im Wandel: Das neue Zeitalter von Staatsbankrotten und Umschuldungen
In: Politische Vierteljahresschrift: PVS : German political science quarterly, Band 55, Heft 4, S. 674-698
ISSN: 1862-2860
Political Booms, Financial Crises
We show that political booms, measured by the rise in governments' popularity, predict financial crises above and beyond other better-known early warning indicators, such as credit booms. This predictive power, however, only holds in emerging economies. We show that governments in emerging economies are more concerned about their reputation and tend to ride the short-term popularity benefits of weak credit booms rather than implementing politically costly corrective policies that would help prevent potential crises. We provide evidence of the relevance of this reputation mechanism.
BASE
SSRN
Working paper
Political Booms, Financial Crises
In: CESifo Working Paper Series No. 4935
SSRN
Working paper
SSRN
Working paper
Political Booms, Financial Crises
We show that political booms, measured by the rise in governments' popularity, predict financial crises above and beyond other better-known early warning indicators, such as credit booms. This predictive power, however, only holds in emerging economies. We show that governments in emerging economies are more concerned about their reputation and tend to ride the short-term popularity benefits of weak credit booms rather than implementing politically costly corrective policies that would help prevent potential crises. We provide evidence of the relevance of this reputation mechanism.
BASE