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Promises to repay and sovereign spreads

Promises to repay and sovereign spreads

One way for a government to reassure investors of its willingness to repay is to give them a priority claim to state assets. It remains to be seen, however, whether such commitments are viewed as credible by market participants. This column investigates how markets responded to two such commitments. A commitment by the government of Spain did not affect yield spreads, while one by the government of Puerto Rico did. This may be because, as a sub sovereign, Puerto Rico faced higher constraints on its ability to renege