The Impact of Issuing Foreign Debt on Maturity

In this article we examine the relation between the maturity of sovereign debt and the choice of foreign or local contract terms (parameters). Our primary finding is that the maturities of bonds issued by non-investment-grade (NIG) sovereigns are greater when the bonds are written in foreign parameters. Relinquishing certain key levers, capable of expropriating wealth from its bondholders once the bonds have been issued, provides investors with an enhanced commitment that the sovereign will pay the promised interest and principal. Relatedly, the spread on NIG bonds written in foreign parameters is less than the spread on debt written under local parameters. Investors pay a premium for NIG bonds with foreign parameters. We also find that the maturities of bonds issued by investment-grade (IG) sovereigns are greater than that of debt issued by sovereigns rated NIG. An IG rating provides sufficient credibility to honor longer maturity bonds. Finally, we find a positive relation between maturity and the S&P rating of the issuing sovereign for the subsample of NIG bonds. The higher a sovereign’s rating, the greater the commitment that it will repay its debt, and the greater the maturity of the bonds it is able to issue. Overall, these results are consistent with the Credible Commitment Theory found throughout the literature