Jochen Andritzky, Julian Schumacher, 18 January 2021

For countries experiencing a debt crisis, the restructuring of government bonds is a possible resolution tool. For investors, however, the literature highlights the short-term losses of such operations. This column provides evidence on investment returns over the longer run and finds that bond returns over the longer run – capturing both pre- and post-crisis times – do not differ significantly between crises with and without debt restructuring. What matters more is bondholders’ investment strategy during crises episodes. Conditional on a debt crisis, debt restructuring can even be financially rewarding for creditors investing in distressed bonds.

Marcos Chamon, Julian Schumacher, Christoph Trebesch, 06 November 2018

Do investors care about the legal characteristics of sovereign debt? Focusing on the euro area, this column compares sovereign bonds issued under domestic law  to those issued under a foreign jurisdiction, which are harder to restructure in a debt crisis since they are out of reach of the borrowing country’s legislature. This legal protection means that foreign law bonds trade at a premium (with lower yields), but only in situations of severe distress such as Greece or Portugal in 2011/2012. In the midst of a crisis, governments can borrow more cheaply by issuing in foreign law. 

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