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Does Strengthening Collective Action Clauses (CACs) Help?

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  • Sayantan Ghosal
  • Kannika Thampanishvong

    ()

Abstract

We study the effect of strengthening CACs in a debt rollover model of a sovereign debt crisis. Conditional on default, there are multiple equilibria: the impact of strengthening CACs depends critically on the prevailing equilibrium. For a subset of equilibria, (i) given a fixed number of creditors, we derive an optimal CAC threshold and (ii) given a fixed CAC threshold, as the number of creditors becomes larger, we show a convergence to efficient information aggregation. Moreover, strengthening CACs may actually increase the ex ante probability of adverse shock. Our analysis makes the case for a formal sovereign bankruptcy procedure.

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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 0711.

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Date of creation: Jun 2007
Date of revision: Oct 2007
Handle: RePEc:san:cdmawp:0711

Note: This paper was previously circulated with the title ‘Bargaining, Moral Hazard and Sovereign Debt Crisis’.
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Keywords: Sovereign Debt; Bargaining; Coordination; Moral Hazard; Collective Action Clauses.;

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References

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  1. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-97, June.
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  8. Olivier Jeanne, 2004. "Debt Maturity and the International Financial Architecture," IMF Working Papers 04/137, International Monetary Fund.
  9. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
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  12. Misa Tanaka, 2005. "Bank loans versus bond finance: implications for sovereign debtors," Bank of England working papers 267, Bank of England.
  13. 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.
  14. Jeromin Zettelmeyer & Federico Sturzenegger, 2005. "Haircuts: Estimating Investor Losses in Sovereign Debt Restructurings, 1998-2005," IMF Working Papers 05/137, International Monetary Fund.
  15. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
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  17. Ghosal, Sayantan & Miller, Marcus, 2003. "Coordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures," CEPR Discussion Papers 3729, C.E.P.R. Discussion Papers.
  18. Gai, Prasanna & Hayes, Simon & Shin, Hyun Song, 2004. "Crisis costs and debtor discipline: the efficacy of public policy in sovereign debt crises," Journal of International Economics, Elsevier, vol. 62(2), pages 245-262, March.
  19. Jean Tirole, 2003. "Inefficient Foreign Borrowing: A Dual-and Common-Agency Perspective," Levine's Working Paper Archive 506439000000000136, David K. Levine.
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Citations

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Cited by:
  1. Sayantan Ghosal & Marcus Miller & Kannika Thampanishvong, 2010. "Delay and Haircuts in Sovereign Debt: Recovery and Sustainability," Discussion Paper Series, Department of Economics 1004, Department of Economics, University of St. Andrews.
  2. 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.
  3. Karel Janda, 2009. "Bankruptcies With Soft Budget Constraint," Manchester School, University of Manchester, vol. 77(4), pages 430-460, 07.

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