Working Paper: CEPR ID: DP13673
Authors: Mitú Gulati; Ugo Panizza; Mark Weidemaier; Grace Willingham
Abstract: During the European sovereign debt crisis of 2011-13, some nations faced with rising borrowing costs adopted commitments to treat bondholders as priority claimants. That is, if there was a shortage of funds, bondholders would be paid first. In this article, we analyze the prevalence and variety of these types of commitments and ask whether they impact borrowing costs. We examine a widely-touted reform at the height of the Euro sovereign debt crisis in 2011, in which Spain enshrined in its constitution a strong commitment to give absolute priority to public debt claimants. We find no evidence that this reform had any impact on Spanish sovereign bond yields. By contrast, our examination of the U.S. Commonwealth of Puerto Rico suggests that constitutional priority promises can have an impact, at least where the borrower government is subject to supervening law and legal institutions.
Keywords: Sovereign Debt; Debt Sustainability; Sovereign Spreads
JEL Codes: E62; H62; H63; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Legal commitments to prioritize public debt (H63) | Borrowing costs (G32) |
| Amendment to the Spanish constitution in September 2011 (K16) | Spanish sovereign bond yields (H63) |
| Puerto Rico's constitutional priority promises (H69) | Borrowing costs (G32) |
| Differential credibility of commitments (D79) | Divergent impact on yield spreads between Puerto Rico and Spain (F69) |