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Collective action clauses: how do they weigh on sovereigns?

  • Alfredo Bardozzetti

    ()

    (Bank of Italy)

  • Davide Dottori

    ()

    (Bank of Italy)

We study the effects of the adoption of collective action clauses (CACs) on government bond yields by exploiting secondary market data on sovereigns quoted in international markets from March 2007 to April 2011. CACs are assessed security by security. Using a panel data approach, we find a U-shaped effect of CACs on yields according to credit rating of the issuer. While the impact is negligible for the highest ratings, there emerges a significant yield discount for mid-ratings, which is smaller for bad ratings and possibly insignificant for the worst ratings. The relationship appears fairly robust across a number of robustness checks. This evidence may reflect the fact that CACs are valuable as they help orderly restructuring unless the perceived probability of default is too small. Nevertheless, at low ratings this relevance can be weakened by an increasing moral hazard risk.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 897.

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Date of creation: Jan 2013
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Handle: RePEc:bdi:wptemi:td_897_13
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Web page: http://www.bancaditalia.it

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