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Crisis Resolution: Next Steps

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  • Eichengreen, Barry
  • Kletzer, Kenneth
  • Mody, Ashoka

Abstract

At the spring 2003 meetings of the IMF and World Bank it was decided to push ahead with the contractual approach to smoothing the process of sovereign debt restructuring by encouraging the more widespread use of collective action clauses (CACs) in international bonds. This decision was shaped by Mexico’s successful launch the preceding March of a $1 billion global bond, subject to New York law but featuring CACs, and by subsequent issues with similar provisions from a number of other emerging market countries. In this paper we reassess the efficacy of this strategy for addressing problems of crisis resolution. We concentrate on two questions, drawing on both theory and new empirical evidence. First, are speculative credits likely to follow investment grade countries in adding CACs to their loan instruments? While our analysis of sources of resistance to contractual innovation creates reasons for hoping that Mexico’s pathbreaking issue may have broken an important logjam, both theory and evidence highlight the moral hazard associated with restructuring-friendly provisions for countries with poor credit. They suggest that CACs may raise the cost of borrowing for countries with poor credit ratings, especially in periods when sentiment toward emerging markets is relatively unfavorable, leaving them slow to embrace these provisions. Second, are CACs sufficient to solve problems of cross issue coordination among creditors, the so-called aggregation problem? The market appears to be most concerned about aggregation with respect to poor credits with very limited market access. However, because investors may not anticipate the relapse of good credits into repayment difficulties, cross issue coordination may become a problem for other issuers as well. We therefore conclude that there is a need to encourage the development of super-collective action clauses, bondholders committees, and a code of creditor conduct.

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Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt4cj974r4.

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Date of creation: 01 Jun 2003
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Handle: RePEc:cdl:ucscec:qt4cj974r4

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  1. Richards, Anthony & Gugiatti, Mark, 2003. "Do Collective Action Clauses Influence Bond Yields? New Evidence from Emerging Markets," International Finance, Wiley Blackwell, vol. 6(3), pages 415-47, Winter.
  2. Jeremy I. Bulow & Kenneth Rogoff, 1987. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  3. Törbjörn I. Becker & Anthony J. Richards & Yunyong Thaicharoen, 2001. "Bond Restructuring and Moral Hazard," IMF Working Papers 01/92, International Monetary Fund.
  4. Morris Goldstein, 2003. "Debt Sustainability, Brazil, and the IMF," Working Paper Series WP03-1, Peterson Institute for International Economics.
  5. Bulow, Jeremy & Rogoff, Kenneth S., 1989. "A Constant Recontracting Model of Sovereign Debt," Scholarly Articles 12491028, Harvard University Department of Economics.
  6. Kenneth M. Kletzer and Brian D. Wright., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research (CIDER) Working Papers C98-100, University of California at Berkeley.
  7. Eichengreen, Barry & Mody, Ashoka, 1999. "Would Collective Action Clauses Raise Borrowing Costs?," CEPR Discussion Papers 2343, C.E.P.R. Discussion Papers.
  8. Stanley Fischer, 2002. "Financial Crises and Reform of the International Financial System," NBER Working Papers 9297, National Bureau of Economic Research, Inc.
  9. Eichengreen, Barry, 2002. "Financial Crises and What to Do About Them," OUP Catalogue, Oxford University Press, number 9780199257447, September.
  10. Peter B. Kenen, 2001. "International Financial Architecture: What's New? What's Missing?, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 335.
  11. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, September.
  12. Kenneth Kletzer, 2003. "Sovereign Bond Restructuring," IMF Working Papers 03/134, International Monetary Fund.
  13. Raffer, Kunibert, 1990. "Applying chapter 9 insolvency to international debts: An economically efficient solution with a human face," World Development, Elsevier, vol. 18(2), pages 301-311, February.
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