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Do Collective Action Clauses Raise Borrowing Costs?

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  • Barry Eichengreen
  • Ashoka Mody

Abstract

We compare launch spreads on emerging-market bonds subject to UK governing law, which typically include collective action clauses, with spreads on bonds subject to US law, which do not. Collective-action clauses reduce the cost of borrowing for more creditworthy issuers, who appear to benefit from the ability to avail themselves of an orderly restructuring process. Less creditworthy issuers, in contrast, pay higher spreads. It appears that for less creditworthy borrowers the advantages of orderly restructuring are offset by the moral hazard and default risk associated with the presence of renegotiation-friendly loan provisions. We draw out the implications for the debate over whether to encourage the wider utilisation of these provisions as part of the effort to strengthen the international financial architecture. Copyright 2004 Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 114 (2004)
Issue (Month): 495 (04)
Pages: 247-264

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Handle: RePEc:ecj:econjl:v:114:y:2004:i:495:p:247-264

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Cited by:
  1. Diego Saravia, 2013. "Vulnerability, Crisis and Debt Maturity: Do IMF Interventions Shorten the Length of Borrowing?," Working Papers Central Bank of Chile 697, Central Bank of Chile.
  2. Lee, Jong-Wha & Shin, Kwanho, 2008. "IMF bailouts and moral hazard," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 816-830, September.
  3. Ghosal, Sayantan; Thampanishvong, Kannika, 2010. "Does strengthening Collective Action Clauses (CACs) help?," CAGE Online Working Paper Series 29, Competitive Advantage in the Global Economy (CAGE).
  4. Alfredo Bardozzetti & Davide Dottori, 2013. "Collective action clauses: how do they weigh on sovereigns?," Temi di discussione (Economic working papers) 897, Bank of Italy, Economic Research and International Relations Area.
  5. Rohan Pitchford & Mark L. J. Wright, 2012. "Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 812-837.
  6. Ashoka Mody, 2004. "What is An Emerging Market?," IMF Working Papers 04/177, International Monetary Fund.
  7. Barkbu, Bergljot & Eichengreen, Barry & Mody, Ashoka, 2012. "Financial crises and the multilateral response: What the historical record shows," Journal of International Economics, Elsevier, vol. 88(2), pages 422-435.
  8. Gelpern, Anna & Gulati, Mitu, 2013. "The wonder-clause," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 367-385.
  9. Christoph Trebesch & Michael G Papaioannou & Udaibir S. Das, 2012. "Sovereign Debt Restructurings 1950-2010," IMF Working Papers 12/203, International Monetary Fund.
  10. Olivier Jeanne, 2004. "Debt Maturity and the International Financial Architecture," IMF Working Papers 04/137, International Monetary Fund.
  11. Daniel Leigh & Andrea Pescatori & Jaime Guajardo, 2011. "Expansionary Austerity New International Evidence," IMF Working Papers 11/158, International Monetary Fund.
  12. Stephen Quinn, 2008. "Securitization of Sovereign Debt: Corporations as a Sovereign Debt Restructuring Mechanism in Britain, 1694-1750," Working Papers 200701, Texas Christian University, Department of Economics.
  13. Bardozzetti, Alfredo & Dottori, Davide, 2014. "Collective action clauses: How do they affect sovereign bond yields?," Journal of International Economics, Elsevier, vol. 92(2), pages 286-303.
  14. Marc Flandreau, Juan Flores, Norbert Gaillard, Sebastiā€”n Nieto-Parra, 2011. "The Changing Role of Global Financial Brands in the Underwriting of Foreign Government Debt (1815-2010)," IHEID Working Papers 15-2011, Economics Section, The Graduate Institute of International Studies, revised 05 Dec 2011.

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