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Would Collective Action Clauses Raise Borrowing Costs?

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Author Info
Eichengreen, Barry
Mody, Ashoka

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Abstract

We examine the implications for borrowing costs of including collective-action clauses in loan contracts. For a sample of some 2,000 international bonds, we compare the spreads on bonds subject to UK governing law, which typically include collective-action clauses, with spreads on bonds subject to US law, which do not. Contrary to the assertions of some market participants, we find that collective-action clauses in fact reduce the cost of borrowing for more credit-worthy issuers, who appear to benefit from the ability to avail themselves of an orderly restructuring process. In contrast, less credit-worthy issuers pay, if anything, higher spreads. We conjecture that for less credit-worthy borrowers the advantages of orderly restructuring are offset by the moral hazard and default risk associated with the presence of renegotiation-friendly loan provisions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2343.

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Date of creation: Dec 1999
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Handle: RePEc:cpr:ceprdp:2343

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Keywords: Debt IMF Restructuring

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Find related papers by JEL classification:
F0 - International Economics - - General
F30 - International Economics - - International Finance - - - General

References listed on IDEAS
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  1. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January. [Downloadable!] (restricted)
  2. Barry Eichengreen & Ashoka Mody, 1999. "Lending Booms, Reserves, and the Sustainability of Short-Term Debt: Inferences from the Pricing of Syndicated Bank Loans," NBER Working Papers 7113, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Eichengreen, Barry & Mody, Ashoka, 1998. "Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?," International Finance, Blackwell Publishing, vol. 1(1), pages 35-57, October. [Downloadable!] (restricted)
  4. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Roman Kraeussl, 2003. "A Critique on the Proposed Use of External Sovereign Credit Ratings in Basel II," CFS Working Paper Series 2003/23, Center for Financial Studies. [Downloadable!]
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  2. Eichengreen, Barry & Ruehl, Christoph, 2000. "The Bail-In Problem: Systematic Goals, Ad Hoc Means," CEPR Discussion Papers 2427, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Petra M. Geraats., 2000. "Would Collective Action Clauses Raise Borrowing Costs? An Update and Additional Results." Barry Eichengreen and Ashoka Mody. July 2000.Abstract Center for International and Development Economics Research (CIDER) Working Papers C00-114, University of California at Berkeley. [Downloadable!]
  4. Kenneth Kletzer, 2004. "Resolving sovereign debt crises with collective action clauses," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Feb. 20. [Downloadable!]
  5. Eichengreen, Barry & Mody, Ashoka, 2003. "Is Aggregation a Problem for Sovereign Debt Restructuring?," CEPR Discussion Papers 3771, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. 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. [Downloadable!]
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  7. José Wynne & Federico Weinschelbaum, 2004. "Renegotiation, Collective Action Clauses and Sovereign Debt Markets," Econometric Society 2004 Latin American Meetings 153, Econometric Society. [Downloadable!]
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  8. Stanley Fischer, 2003. "Financial crises and reform of the international financial system," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 139(1), pages 1-37, March. [Downloadable!] (restricted)
  9. Federico Sturzenegger & Punan Chuham, 2003. "Default`s in the 1990`s: What have we learned?"," Business School Working Papers seis, Universidad Torcuato Di Tella. [Downloadable!]
  10. Barry Eichengreen & Kenneth Kletzer & Ashoka Mody, 2003. "Crisis Resolution: Next Steps," Santa Cruz Center for International Economics, Working Paper Series 1008, Center for International Economics, UC Santa Cruz. [Downloadable!]
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  11. Mark M. Spiegel, 2002. "Towards a sovereign debt restructuring mechanism," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Jun 28. [Downloadable!]
  12. Barry Eichengreen & Ashoka Mody, 2001. "Would Collective Action Clauses Raise Borrowing Costs? An Update and Additional Results," International Finance 0012003, EconWPA. [Downloadable!]
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  13. Esteban Jadresic & Klaus Schmidt-Hebbel & Rodrigo Valdés, 2003. "Crisis Financieras Internacionales, Prestamista de Última Instancia y Nueva Arquitectura Financiera Internacional," Working Papers Central Bank of Chile 212, Central Bank of Chile. [Downloadable!]
  14. Benu Schneider, 2005. "Do Global Standards And Codes Prevent Financial Crises? Some Proposals On Modifying The Standards-Based Approach," UNCTAD Discussion Papers 177, United Nations Conference on Trade and Development. [Downloadable!]
  15. Issam Hallak, 2003. "Courts and Sovereign Eurobonds: Credibility of the Judicial Enforcement of Repayment," CFS Working Paper Series 2003/34, Center for Financial Studies. [Downloadable!]
  16. Federico Sturzenegger, 2002. "Defaults in the 90´s: Factbook and Preliminary Lessons," Business School Working Papers veintidos, Universidad Torcuato Di Tella. [Downloadable!]
  17. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2004. "Capital Controls, Liberalizations, and Foreign Direct Investement," NBER Working Papers 10337, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Se-Jik Kim, 2004. "Timing of International Bailouts," IMF Working Papers 04/9, International Monetary Fund. [Downloadable!]
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