Crisis Resolution: Next Steps
At the spring 2003 meetings of the IMF and World Bank it was decided to push ahead with the contractual approach to smoothing the process of sovereign debt restructuring by encouraging the more widespread use of collective action clauses (CACs) in international bonds. This decision was shaped by Mexicoâ€™s successful launch the preceding March of a $1 billion global bond, subject to New York law but featuring CACs, and by subsequent issues with similar provisions from a number of other emerging market countries. In this paper we reassess the efficacy of this strategy for addressing problems of crisis resolution. We concentrate on two questions, drawing on both theory and new empirical evidence. First, are speculative credits likely to follow investment grade countries in adding CACs to their loan instruments? While our analysis of sources of resistance to contractual innovation creates reasons for hoping that Mexicoâ€™s pathbreaking issue may have broken an important logjam, both theory and evidence highlight the moral hazard associated with restructuring-friendly provisions for countries with poor credit. They suggest that CACs may raise the cost of borrowing for countries with poor credit ratings, especially in periods when sentiment toward emerging markets is relatively unfavorable, leaving them slow to embrace these provisions. Second, are CACs sufficient to solve problems of cross issue coordination among creditors, the so-called aggregation problem? The market appears to be most concerned about aggregation with respect to poor credits with very limited market access. However, because investors may not anticipate the relapse of good credits into repayment difficulties, cross issue coordination may become a problem for other issuers as well. We therefore conclude that there is a need to encourage the development of super-collective action clauses, bondholders committees, and a code of creditor conduct.
|Date of creation:||01 Jun 2003|
|Contact details of provider:|| Web page: http://www.escholarship.org/repec/sccie/|
More information through EDIRC
References listed on IDEAS
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.:
- Bulow, Jeremy & Rogoff, Kenneth, 1989.
"A Constant Recontracting Model of Sovereign Debt,"
Journal of Political Economy,
University of Chicago Press, vol. 97(1), pages 155-178, February.
- Jeremy I. Bulow & Kenneth Rogoff, 1986. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
- Bulow, Jeremy & Rogoff, Kenneth S., 1989. "A Constant Recontracting Model of Sovereign Debt," Scholarly Articles 12491028, Harvard University Department of Economics.
- 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.
- Eichengreen, Barry & Mody, Ashoka, 1999. "Would Collective Action Clauses Raise Borrowing Costs?," CEPR Discussion Papers 2343, C.E.P.R. Discussion Papers.
- Barry Eichengreen & Ashoka Mody, 2000. "Would Collective Action Clauses Raise Borrowing Costs?," NBER Working Papers 7458, National Bureau of Economic Research, Inc.
- Brian D. Wright & Kenneth M. Kletzer, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, vol. 90(3), pages 621-639, June.
- Kenneth M. Kletzer and Brian D. Wright., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research (CIDER) Working Papers C98-100, University of California at Berkeley.
- Kenneth M. Kletzer & Brian D. Wright, 2000. "Sovereign Debt as Intertemporal Barter," International Finance 0003004, EconWPA.
- Kletzer, Kenneth M. & Wright, Brian D., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research, Working Paper Series qt4qg3c42v, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
- 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.
- Torbjorn I. Becker & Anthony J. Richards & Yunyong Thaicharoen, 2001. "Bond Restructuring and Moral Hazard; Are Collective Action Clauses Costly?," IMF Working Papers 01/92, International Monetary Fund.
- Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
- 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.
- 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.
- Stanley Fischer, 2002. "Financial Crises and Reform of the International Financial System," NBER Working Papers 9297, National Bureau of Economic Research, Inc.
- Kenneth Kletzer, 2003. "Sovereign Bond Restructuring; Collective Action Clauses and official Crisis Intervention," IMF Working Papers 03/134, International Monetary Fund.
- Morris Goldstein, 2003. "Debt Sustainability, Brazil, and the IMF," Working Paper Series WP03-1, Peterson Institute for International Economics.
- Peter B. Kenen, 2001. "International Financial Architecture: What's New? What's Missing?, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 335, November.
- Raffer, Kunibert, 1990. "Applying chapter 9 insolvency to international debts: An economically efficient solution with a human face," World Development, Elsevier, vol. 18(2), pages 301-311, February.
- Eichengreen, Barry, 2002. "Financial Crises and What to Do About Them," OUP Catalogue, Oxford University Press, number 9780199257447. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:cdl:scciec:qt4cj974r4. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lisa Schiff)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.