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Does strengthening Collective Action Clauses (CACs) help?

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  • Ghosal, Sayantan; Thampanishvong, Kannika

    (University of Warwick; University of St Andrews)

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 are 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-o¤ and discuss the policy implications of our results.

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Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 29.

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Date of creation: 2010
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Handle: RePEc:cge:wacage:29

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Keywords: Sovereign Debt; Coordination; Moral Hazard; Collective Action Clauses; Ex Ante; Ex Post; Efficiency;

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  1. Abhijit Sen Gupta, 2008. "Cost of Holding Excess Reserves - The Indian Experience," Finance Working Papers 22165, East Asian Bureau of Economic Research.
  2. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February.
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  4. Federico Weinschelbaum & Jose Wynne, 2004. "Renegotiation, Collective Action Clauses and Sovereign Debt Markets," Working Papers 75, Universidad de San Andres, Departamento de Economia, revised Aug 2004.
  5. Kenneth Kletzer, 2004. "Resolving sovereign debt crises with collective action clauses," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue feb.20.
  6. Eichengreen, Barry & Kletzer, Kenneth & Mody, Ashoka, 2003. "Crisis Resolution: Next Steps," Santa Cruz Center for International Economics, Working Paper Series qt4cj974r4, Center for International Economics, UC Santa Cruz.
  7. Eichengreen, Barry & Mody, Ashoka, 1999. "Would Collective Action Clauses Raise Borrowing Costs?," CEPR Discussion Papers 2343, C.E.P.R. Discussion Papers.
  8. Nouriel Roubini & Paolo Manasse, 2005. "Rules of Thumb for Sovereign Debt Crises," IMF Working Papers 05/42, International Monetary Fund.
  9. Becker, Torbjorn & Richards, Anthony & Thaicharoen, Yunyong, 2003. "Bond restructuring and moral hazard: are collective action clauses costly?," Journal of International Economics, Elsevier, vol. 61(1), pages 127-161, October.
  10. Misa Tanaka, 2005. "Bank loans versus bond finance: implications for sovereign debtors," Bank of England working papers 267, Bank of England.
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  16. Jean Tirole, 2003. "Inefficient Foreign Borrowing: A Dual-and Common-Agency Perspective," Levine's Working Paper Archive 506439000000000136, David K. Levine.
  17. Gai,Prasanna & Simon Hayes & Hyun Song Shin, 2002. "Crisis costs and debtor discipline: the efficacy of public policy in sovereign debt crises," Departmental Working Papers 2002-02, The Australian National University, Arndt-Corden Department of Economics.
  18. Jeromin Zettelmeyer & Federico Sturzenegger, 2005. "Haircuts," IMF Working Papers 05/137, International Monetary Fund.
  19. Bulow, Jeremy & Rogoff, Kenneth S., 1989. "A Constant Recontracting Model of Sovereign Debt," Scholarly Articles 12491028, Harvard University Department of Economics.
  20. Olivier Jeanne, 2004. "Debt Maturity and the International Financial Architecture," IMF Working Papers 04/137, International Monetary Fund.
  21. 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.
  22. Sayantan Ghosal & Marcus Miller, 2003. "Co-ordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures," Economic Journal, Royal Economic Society, vol. 113(487), pages 276-304, 04.
  23. 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.
  24. Marta Ruiz-Arranz & Milan Zavadjil, 2008. "Are Emerging Asia’s Reserves Really too High?," IMF Working Papers 08/192, International Monetary Fund.
  25. Barry Eichengreen & Ashoka Mody, 2004. "Do Collective Action Clauses Raise Borrowing Costs?," Economic Journal, Royal Economic Society, vol. 114(495), pages 247-264, 04.
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Citations

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Cited by:
  1. 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.
  2. Rohan Pitchford & Mark L. J. Wright, 2010. "Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment," NBER Working Papers 16632, National Bureau of Economic Research, Inc.
  3. Sayantan Ghosal & Marcus Miller & Kannika Thampanishvong, 2010. "Delay and Haircuts in Sovereign Debt: Recovery and Sustainability," CDMA Working Paper Series 201015, Centre for Dynamic Macroeconomic Analysis.
  4. Karel Janda, 2009. "Bankruptcies With Soft Budget Constraint," Manchester School, University of Manchester, vol. 77(4), pages 430-460, 07.
  5. 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.
  6. 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.

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