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Optimal collective action clause thresholds

Author

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  • Andrew G Haldane
  • Adrian Penalver
  • Victoria Saporta
  • Hyun Song Shin

Abstract

Since February 2003 a number of debtor countries have issued bonds with collective action clauses (CACs) under New York law - a development welcomed by the official sector as tangible progress towards more orderly crisis resolution. Not all of these countries, however, have opted for the same CAC voting threshold, raising concerns that lack of standardisation might undermine the wider adoption of CACs. In this paper, debtors' optimal choice of CAC threshold is analysed using a theoretical model of 'grey-zone' financial crisis, which allows for the interaction of liquidity problems with solvency problems. It finds that individual countries may wish to set different thresholds because of differing risk preferences and creditworthiness. Strongly risk-averse debtors put much greater weight on pay-offs during crisis periods than during non-crisis periods and are therefore more likely to choose lower CAC thresholds than less risk-averse debtors. The worse the creditworthiness of risk-averse debtors, however, the more likely they will want to issue bonds with high collective action clauses.

Suggested Citation

  • Andrew G Haldane & Adrian Penalver & Victoria Saporta & Hyun Song Shin, 2005. "Optimal collective action clause thresholds," Bank of England working papers 249, Bank of England.
  • Handle: RePEc:boe:boeewp:249
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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2005/WP249.pdf
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    References listed on IDEAS

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    2. 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 587-597, June.
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    4. Eichengreen, Barry & Mody, Ashoka, 1999. "Would Collective Action Clauses Raise Borrowing Costs?," CEPR Discussion Papers 2343, C.E.P.R. Discussion Papers.
    5. Michael P. Dooley, 2000. "Can Output Losses Following International Financial Crises be Avoided?," NBER Working Papers 7531, National Bureau of Economic Research, Inc.
    6. Haldane, Andrew G. & Penalver, Adrian & Saporta, Victoria & Shin, Hyun Song, 2005. "Analytics of sovereign debt restructuring," Journal of International Economics, Elsevier, vol. 65(2), pages 315-333, March.
    7. Eichengreen, Barry & Mody, Ashoka, 2000. "Would collective action clauses raise borrowing costs? - an update and additional results," Policy Research Working Paper Series 2363, The World Bank.
    8. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
    9. 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 415-447, Winter.
    10. Kenneth Kletzer, 2003. "Sovereign Bond Restructuring; Collective Action Clauses and official Crisis Intervention," IMF Working Papers 03/134, International Monetary Fund.
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