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Renegotiation, Collective Action Clauses and Sovereign Debt Markets

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  • Federico Weinschelbaum

    ()
    (Department of Economics, Universidad de San Andres)

  • Jose Wynne

    (Duke University, Fuqua School of Business)

Abstract

Collective action clauses (CACs) are provisions specifying that a supermajority of bondholders can change the terms of a bond. We study how CACs determine governments’ fiscal incentives, sovereign bond prices and default probabilities in environments with and without contingent debt and IMF presence. We claim that CACs are likely to be an irrelevant dimension of debt contracts in current sovereign debt markets because of the variety of instruments utilized by sovereigns and the implicit IMF guarantee. Nonetheless, under a new international bankruptcy regime like that recently proposed by the IMF, CACs can increase significantly the cost of borrowing for sovereigns, contrary to what is suggested in previous empirical literature.

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File URL: ftp://webacademicos.udesa.edu.ar/pub/econ/doc75.pdf
File Function: First version, 2004
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Bibliographic Info

Paper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 75.

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Length: 40 pages
Date of creation: Aug 2004
Date of revision: Aug 2004
Handle: RePEc:sad:wpaper:75

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Keywords: Sovereign debt; Collective action clauses; Renegotiation; Moral hazard; International bankruptcy court;

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References

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  1. Kenneth Kletzer & Barry J. Eichengreen & Ashoka Mody, 2003. "Crisis Resolution," IMF Working Papers 03/196, International Monetary Fund.
  2. Kenneth Rogoff & Jeromin Zettelmeyer, 2002. "Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976-2001," IMF Staff Papers, Palgrave Macmillan, vol. 49(3), pages 8.
  3. Hyun Song Shin & Prasanna Gai & Simon Hayes, 2001. "Crisis costs and debtor discipline: the efficacy of public policy in sovereign debt crises," FMG Discussion Papers dp390, Financial Markets Group.
  4. Gertner, Robert & Scharfstein, David, 1991. " A Theory of Workouts and the Effects of Reorganization Law," Journal of Finance, American Finance Association, vol. 46(4), pages 1189-1222, September.
  5. Eichengreen, Barry & Ruhl, Christof, 2001. "The bail-in problem: systematic goals, ad hoc means," Economic Systems, Elsevier, vol. 25(1), pages 3-32, March.
  6. Andrew G Haldane & Adrian Penalver & Victoria Saporta & Hyun Song Shin, 2003. "Analytics of sovereign debt restructuring," Bank of England working papers 203, Bank of England.
  7. Olivier Jeanne, 2004. "Debt Maturity and the International Financial Architecture," IMF Working Papers 04/137, International Monetary Fund.
  8. Eichengreen, Barry & Mody, Ashoka, 1999. "Would Collective Action Clauses Raise Borrowing Costs?," CEPR Discussion Papers 2343, C.E.P.R. Discussion Papers.
  9. Marcus Miller & Lei Zhang, 1999. "Sovereign Liquidity Crisis: The Strategic Case for a Payments Standstill," CSGR Working papers series 35/99, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  10. 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.
  11. Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-89, July.
  12. 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.
  13. Ghosal, Sayantan & Miller, Marcus, 2003. "Coordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures," CEPR Discussion Papers 3729, C.E.P.R. Discussion Papers.
  14. Giancarlo Corsetti & Bernardo Guimaraes & Nouriel Roubini, 2003. "International Lending of Last Resort and Moral Hazard: A Model of IMF's Catalytic Finance," NBER Working Papers 10125, National Bureau of Economic Research, Inc.
  15. Ivo Welch & Bris, Arturo, 2001. "The Optimal Concentration of Creditors," Cowles Foundation Discussion Papers 1338, Cowles Foundation for Research in Economics, Yale University, revised Jan 2002.
  16. Barry Eichengreen & Kenneth Kletzer, 2003. "Crisis Resolution: Next Steps," NBER Working Papers 10095, National Bureau of Economic Research, Inc.
  17. Marcus H. Miller, 2002. "Sovereign Debt Restructuring: New Articles, New Contracts--Or No Change?," Policy Briefs PB02-03, Peterson Institute for International Economics.
  18. Stephen Morris & Hyun Song Shin, 2003. "Catalytic Finance: When Does It Work?," Cowles Foundation Discussion Papers 1400, Cowles Foundation for Research in Economics, Yale University.
  19. Corsetti, Giancarlo & Guimarães, Bernardo & Roubini, Nouriel, 2004. "International Lending of Last Resort and Moral Hazard: A Model of the IMF's Catalytic Finance," CEPR Discussion Papers 4383, C.E.P.R. Discussion Papers.
  20. Kenneth Kletzer, 2003. "Sovereign Bond Restructuring," IMF Working Papers 03/134, International Monetary Fund.
  21. Jeromin Zettelmeyer & Kenneth Rogoff, 2002. "Bankruptcy Procedures for Sovereigns," IMF Working Papers 02/133, International Monetary Fund.
  22. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February.
  23. Michael P. Dooley, 2000. "Can Output Losses Following International Financial Crises be Avoided?," NBER Working Papers 7531, National Bureau of Economic Research, Inc.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Just What Is It that Makes Them So Different, So Appealing?
    by ELY in Blog de Eduardo Levy Yeyati on 2010-03-23 23:59:00
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Cited by:
  1. Yan Bai & Jing Zhang, 2009. "Duration of Sovereign Debt Renegotiation," Working Papers 593, Research Seminar in International Economics, University of Michigan.
  2. 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.
  3. Sayantan Ghosal & Kannika Thampanishvong, 2007. "Does Strengthening Collective Action Clauses (CACs) Help?," CDMA Working Paper Series 200711, Centre for Dynamic Macroeconomic Analysis, revised 15 Oct 2007.
  4. 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.
  5. Prokop, Jacek, 2012. "Bargaining over debt rescheduling," MPRA Paper 44315, University Library of Munich, Germany.
  6. Stephen Quinn, 2008. "Securitization of Sovereign Debt: Corporations as a Sovereign Debt Restructuring Mechanism in Britain, 1694-1750," Working Papers 200701, Texas Christian University, Department of Economics.
  7. 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.
  8. 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.
  9. Vivian Z. Yue, 2005. "Sovereign Default and Debt Renegotiation," 2005 Meeting Papers 138, Society for Economic Dynamics.
  10. Karel Janda, 2009. "Bankruptcies With Soft Budget Constraint," Manchester School, University of Manchester, vol. 77(4), pages 430-460, 07.
  11. Canuto, Otaviano & Pinto, Brian & Prasad, Mona, 2012. "Orderly sovereign debt restructuring : missing in action !," Policy Research Working Paper Series 6054, The World Bank.
  12. Ran Bi, 2008. ""Beneficial" Delays in Debt Restructuring Negotiations," 2008 Meeting Papers 766, Society for Economic Dynamics.
  13. Roberto Cortes Conde, 2008. "Spanish America Colonial Patterns: The Rio de La Plata," Working Papers 96, Universidad de San Andres, Departamento de Economia, revised Mar 2008.
  14. Goderis, Benedikt & Wagner, Wolf, 2009. "Credit Derivatives and Sovereign Debt Crises," MPRA Paper 17314, University Library of Munich, Germany.
  15. Patrick Bolton & Olivier Jeanne, 2009. "Structuring and Restructuring Sovereign Debt: The Role of Seniority -super-1," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 879-902.

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