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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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Bibliographic Info

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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Cited by:
  1. 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.
  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. 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.
  4. Ghosal, Sayantan & Miller, Marcus & Thampanishvong, Kannika, 2010. "Delay and Haircuts in Sovereign Debt: Recovery and Sustainability," SIRE Discussion Papers 2010-100, Scottish Institute for Research in Economics (SIRE).
  5. Karel Janda, 2009. "Bankruptcies With Soft Budget Constraint," Manchester School, University of Manchester, vol. 77(4), pages 430-460, 07.
  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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