Clearinghouse for Information: Market Implications of US Judicial Decisions

• In Event: Politics of Sovereign Debt and International Finance

Abstract

The Foreign Sovereign Immunities Act (FSIA) has permitted investors to sue foreign states over commercial issues. However, the ability of this domestic legislation to have an impact on the market is unknown. What impact, if any, does a US court ruling have on the sovereign debt market via borrowing costs? I argue that the FSIA can be viewed as legislation that increases moral hazard. If an investor believes that the FSIA will be there to help them recoup their losses, they would be more willing to take on riskier investments. As such, countries that are ruled against are more likely to have lower borrowing costs than countries that defaulted on their debt but were not ruled against. To test this theory, I use an original data set of FSIA sovereign debt litigation cases and exploit the exogeneity of court rulings. I find support for my theory that investor confidence grows when a debtor state is ruled against.

Author

• Monica Widmann, Seton Hall University