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Optimal collective action clause thresholds

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  • Andrew G Haldane
  • Adrian Penalver
  • Victoria Saporta
  • Hyun Song Shin

Abstract

Since February 2003 a number of debtor countries have issued bonds with collective action clauses (CACs) under New York law - a development welcomed by the official sector as tangible progress towards more orderly crisis resolution. Not all of these countries, however, have opted for the same CAC voting threshold, raising concerns that lack of standardisation might undermine the wider adoption of CACs. In this paper, debtors' optimal choice of CAC threshold is analysed using a theoretical model of 'grey-zone' financial crisis, which allows for the interaction of liquidity problems with solvency problems. It finds that individual countries may wish to set different thresholds because of differing risk preferences and creditworthiness. Strongly risk-averse debtors put much greater weight on pay-offs during crisis periods than during non-crisis periods and are therefore more likely to choose lower CAC thresholds than less risk-averse debtors. The worse the creditworthiness of risk-averse debtors, however, the more likely they will want to issue bonds with high collective action clauses.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 249.

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Date of creation: Feb 2005
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Handle: RePEc:boe:boeewp:249

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  1. Roberto Chang & Andrés Velasco, 2000. "Liquidity Crises in Emerging Markets: Theory and Policy," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 11-78 National Bureau of Economic Research, Inc.
  2. Barry Eichengreen & Ashoka Mody, 2001. "Would Collective Action Clauses Raise Borrowing Costs? An Update and Additional Results," International Finance 0012003, EconWPA.
  3. Barry Eichengreen & Kenneth Kletzer & Ashoka Mody, 2003. "Crisis resolution: next steps," Pacific Basin Working Paper Series 03-05, Federal Reserve Bank of San Francisco.
  4. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
  5. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
  6. Eichengreen, Barry & Mody, Ashoka, 1999. "Would Collective Action Clauses Raise Borrowing Costs?," CEPR Discussion Papers 2343, C.E.P.R. Discussion Papers.
  7. Kenneth Kletzer & Barry J. Eichengreen & Ashoka Mody, 2003. "Crisis Resolution," IMF Working Papers 03/196, International Monetary Fund.
  8. Mark Gugiatti & Anthony Richards, 2003. "Do Collective Action Clauses Influence Bond Yields? New Evidence from Emerging Markets," RBA Research Discussion Papers rdp2003-02, Reserve Bank of Australia.
  9. Kenneth Kletzer, 2003. "Sovereign Bond Restructuring," IMF Working Papers 03/134, International Monetary Fund.
  10. Michael P. Dooley, 2000. "Can Output Losses Following International Financial Crises be Avoided?," NBER Working Papers 7531, National Bureau of Economic Research, Inc.
  11. Haldane, Andrew G. & Penalver, Adrian & Saporta, Victoria & Shin, Hyun Song, 2005. "Analytics of sovereign debt restructuring," Journal of International Economics, Elsevier, vol. 65(2), pages 315-333, March.
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Cited by:
  1. Rohan Pitchford & Mark L. J. Wright, 2008. "Holdouts In Sovereign Debt Restructuring: A Theory Of Negotiation In A Weak Contractual Environment," CAMA Working Papers 2008-37, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  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.

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