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Does strengthening Collective Action Clauses (CACs) help?

  • Ghosal, Sayantan; Thampanishvong, Kannika

    (University of Warwick; University of St Andrews)

Does improving creditor coordination by strengthening CACs lead to efficiency gains in the functioning of sovereign bond markets? We address this question in a model featuring both debtor moral hazard and creditor coordination under incomplete information. Conditional on default, we characterize the interim efficient CAC threshold and show that strengthening CACs away from unanimity results in interim welfare gains. However, once the impact of strengthening CACs on debtor’s incentives are taken into account, we demonstrate the robust possibility of a conflict between ex ante and interim efficiency. We calibrate our model to quantify such a welfare trade-o¤ and discuss the policy implications of our results.

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Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 29.

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Date of creation: 2010
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Handle: RePEc:cge:wacage:29
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  1. Weinschelbaum, Federico & Wynne, Jose, 2005. "Renegotiation, collective action clauses and sovereign debt markets," Journal of International Economics, Elsevier, vol. 67(1), pages 47-72, September.
  2. Dani Rodrik, 2006. "The Social Cost of Foreign Exchange Reserves," Working Papers id:357, eSocialSciences.
  3. Kenneth Kletzer, 2003. "Sovereign Bond Restructuring: Collective Action Clauses and official Crisis Intervention," IMF Working Papers 03/134, International Monetary Fund.
  4. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September.
  5. 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.
  6. Olivier Jeanne, 2009. "Debt Maturity and the International Financial Architecture," American Economic Review, American Economic Association, vol. 99(5), pages 2135-48, December.
  7. Sayantan Ghosal & Marcus Miller, 2003. "Co-ordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures," Economic Journal, Royal Economic Society, vol. 113(487), pages 276-304, 04.
  8. Jeromin Zettelmeyer & Federico Sturzenegger, 2005. "Haircuts: Estimating Investor Losses in Sovereign Debt Restructurings, 1998-2005," IMF Working Papers 05/137, International Monetary Fund.
  9. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
  10. Gai,Prasanna & Simon Hayes & Hyun Song Shin, 2002. "Crisis costs and debtor discipline: the efficacy of public policy in sovereign debt crises," Departmental Working Papers 2002-02, The Australian National University, Arndt-Corden Department of Economics.
  11. Barry Eichengreen & Ashoka Mody, 2004. "Do Collective Action Clauses Raise Borrowing Costs?," Economic Journal, Royal Economic Society, vol. 114(495), pages 247-264, 04.
  12. Misa Tanaka, 2006. "Bank Loans Versus Bond Finance: Implications for Sovereign Debtors," Economic Journal, Royal Economic Society, vol. 116(510), pages C149-C171, 03.
  13. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates
    [This Time Is Different: Eight Centuries of Financial Folly]
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  14. Eichengreen, Barry & Kletzer, Kenneth & Mody, Ashoka, 2003. "Crisis Resolution: Next Steps," Santa Cruz Department of Economics, Working Paper Series qt4cj974r4, Department of Economics, UC Santa Cruz.
  15. Bulow, Jeremy & Rogoff, Kenneth S., 1989. "A Constant Recontracting Model of Sovereign Debt," Scholarly Articles 12491028, Harvard University Department of Economics.
  16. Jean Tirole, 2003. "Inefficient Foreign Borrowing: A Dual-and Common-Agency Perspective," Levine's Working Paper Archive 506439000000000136, David K. Levine.
  17. Douglas W. Diamond & Raghuram G. Rajan, 1998. "Liquidity risk, liquidity creation and financial fragility: a theory of banking," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  18. repec:oup:restud:v:48:y:1981:i:2:p:289-309 is not listed on IDEAS
  19. Marta Ruiz-Arranz & Milan Zavadjil, 2008. "Are Emerging Asia’s Reserves Really Too High?," IMF Working Papers 08/192, International Monetary Fund.
  20. Barry Eichengreen & Ashoka Mody, 2000. "Would Collective Action Clauses Raise Borrowing Costs?," NBER Working Papers 7458, National Bureau of Economic Research, Inc.
  21. Törbjörn 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.
  22. Manasse, Paolo & Roubini, Nouriel, 2009. ""Rules of thumb" for sovereign debt crises," Journal of International Economics, Elsevier, vol. 78(2), pages 192-205, July.
  23. Abhijit Sen Gupta, 2008. "Cost of Holding Excess Reserves - The Indian Experience," Finance Working Papers 22165, East Asian Bureau of Economic Research.
  24. Paolo Mauro & Yishay Yafeh, 2003. "The Corporation of Foreign Bondholders," IMF Working Papers 03/107, International Monetary Fund.
  25. Kenneth M. Kletzer, 2004. "Resolving sovereign debt crises with collective action clauses," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue feb.20.
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