The Value of Legal Recourse in Sovereign Bond Markets: Evidence from Argentina

We study how the choice of governing law affects the valuation of sovereign debt. To the extent that sovereign immunity waivers and clauses calling for litigation abroad reduce expropriation risk, then bonds that are governed by foreign law should, ceteris paribus , trade at a premium compared to bonds issued under domestic law. During its 2020 debt exchange, Argentina issued pairs of identical bonds (with the same currency, maturity, coupon, and other features) but under different legal jurisdictions. Leveraging these “twin bonds,” we identify the effect of legal jurisdiction on sovereign bond prices. Our findings indicate that foreign-law bonds consistently trade at higher prices. In addition, overseas/institutional investors tend to disproportionately hold foreign-law bonds. The results suggest low-rated sovereigns have a choice of attracting overseas/institutional investors that shore up longer-term capital needs at lower cost, or issuing bonds that fuel short-term speculator interest and may increase their financial instability.

[1]  Daniel Hansen.  The democratic (dis)advantage: The conditional impact of democracy on credit risk and sovereign default , 2022, Economics & Politics.

[2]  Sarah M. Brooks,et al.  Sovereign Risk and Government Change: Elections, Ideology and Experience , 2022, Comparative Political Studies.

[3]  A. Chari,et al.  Contract Provisions, Default Risk, and Bond Prices , 2021 .

[4]  Chuck Fang,et al.  Restructuring Sovereign Bonds: Holdouts, Haircuts and the Effectiveness of CACs , 2020, IMF Economic Review.

[5]  Julian Schumacher,et al.  Sovereign Defaults in Court , 2014, Journal of International Economics.

[6]  G. Gulati,et al.  Unlawfully-Issued Sovereign Debt , 2020 .

[7]  Martin M Guzman.  An Analysis of Argentina’s 2001 Default Resolution , 2016, Comparative Economic Studies.

[8]  L. Mosley,et al.  Contingent Advantage? Sovereign Borrowing, Democratic Institutions and Global Capital Cycles , 2019, British Journal of Political Science.

[9]  Diego Silveira Pacheco de Oliveira,et al.  Central bank transparency and sovereign risk ratings: a panel data approach , 2019 .

[10]  C. Bodea,et al.  Sovereign Credit Ratings and Central Banks: Why Do Analysts Pay Attention to Institutions? , 2018, Economics & Politics.

[11]  Devin Singh.  Sovereign Debt , 2018, Journal of Religious Ethics.

[12]  M. Chamón,et al.  Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs? , 2018, Journal of International Economics.

[13]  G. Cox,et al.  Executive Constraint and Sovereign Debt: Quasi-Experimental Evidence From Argentina During the Baring Crisis , 2018 .

[14]  Alison Johnston,et al.  Rating Politics? Partisan Discrimination in Credit Ratings in Developed Economies , 2018 .

[15]  G. Gulati,et al.  The Sovereign Debt Listing Puzzle , 2016, Oxford Economic Papers.

[16]  G. Gulati,et al.  Pricing Sovereign Debt: Foreign versus Local Parameters , 2017 .

[17]  G. Gulati,et al.  A Sovereign's Cost of Capital: Go Foreign or Stay Local , 2016 .

[18]  Jens Nordvig.  Legal Risk Premia During the Euro-Crisis: The Role of Credit and Redenomination Risk , 2015 .

[19]  Laura Alfaro.  Sovereign Debt Restructuring: Evaluating the Impact of the Argentina Ruling , 2014 .

[20]  A. Clare,et al.  The Impact of Foreign Governing Law on European Government Bond Yields , 2014 .

[21]  D. Dottori,et al.  Collective action clauses: How do they affect sovereign bond yields? ☆ , 2014 .

[22]  G. Biglaiser,et al.  Finding the “Democratic Advantage” in Sovereign Bond Ratings: The Importance of Strong Courts, Property Rights Protection, and the Rule of Law , 2012, International Organization.

[23]  Brian N. Hicks,et al.  Sovereign Bond Ratings and the Democratic Advantage , 2008 .

[24]  Anna Gelpern.  Domestic Bonds, Credit Derivatives, and the Next Transformation of Sovereign Debt , 2007 .

[25]  Paul M. Vaaler,et al.  Elections, Opportunism, Partisanship and Sovereign Ratings in Developing Countries , 2006 .

[26]  Sebastián Saiegh.  Do Countries Have a “Democratic Advantage”? , 2005 .

[27]  Paul M. Vaaler,et al.  Counting the investor vote: political business cycle effects on sovereign bond spreads in developing countries , 2005 .

[28]  Barry Eichengreen,et al.  Do Collective Action Clauses Raise Borrowing Costs? , 2004 .

[29]  A. Richards,et al.  Do Collective Action Clauses Influence Bond Yields? New Evidence from Emerging Markets , 2003 .

[30]  L. Mosley.  Global Capital and National Governments , 2003 .

[31]  A. Richards,et al.  Bond Restructuring and Moral Hazard: Are Collective Action Clauses Costly? , 2001, SSRN Electronic Journal.

[32]  Richard Cantor,et al.  Determinants and Impact of Sovereign Credit Ratings , 1996 .

[33]  Robert I. Webb.  Macroeconomic Information and Financial Trading , 1994 .

[34]  Douglass C. North,et al.  Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England , 1989, The Journal of Economic History.