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Does strengthening Collective Action Clauses (CACs) help?

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  • Ghosal, Sayantan
  • Thampanishvong, Kannika

Abstract

Does improving creditor coordination by strengthening CACs lead to efficiency gains in the functioning of sovereign bond markets? We address this question in a model featuring both debtor moral hazard and creditor coordination under incomplete information. Conditional on default, we characterize the interim efficient CAC threshold and show that strengthening CACs away from unanimity results in interim welfare gains. However, once the impact of strengthening CACs on debtor's incentives is taken into account, we demonstrate the robust possibility of a conflict between ex ante and interim efficiency. We calibrate our model to quantify such a welfare trade-off and discuss the policy implications of our results.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 89 (2013)
Issue (Month): 1 ()
Pages: 68-78

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Handle: RePEc:eee:inecon:v:89:y:2013:i:1:p:68-78

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Web page: http://www.elsevier.com/locate/inca/505552

Related research

Keywords: Sovereign debt; Coordination; Moral hazard; Collective Action Clauses; Ex ante; Ex post;

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References

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Citations

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Cited by:
  1. Karel Janda, 2009. "Bankruptcies With Soft Budget Constraint," Manchester School, University of Manchester, vol. 77(4), pages 430-460, 07.
  2. Sayantan Ghosal & Marcus Miller & Kannika Thampanishvong, 2010. "Delay and Haircuts in Sovereign Debt: Recovery and Sustainability," Discussion Paper Series, Department of Economics 201004, Department of Economics, University of St. Andrews.
  3. 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.
  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. 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.
  6. Aitor Erce, 2013. "Sovereign debt crises: could an international court minimize them?," Globalization and Monetary Policy Institute Working Paper 142, Federal Reserve Bank of Dallas.

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