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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. Reinhart, Carmen, 2009. "The Second Great Contraction," MPRA Paper 21485, University Library of Munich, Germany.
  2. Manasse, Paolo & Roubini, Nouriel, 2009. ""Rules of thumb" for sovereign debt crises," Journal of International Economics, Elsevier, vol. 78(2), pages 192-205, July.
  3. 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 415-47, Winter.
  4. Douglas W. Diamond & Raghuram G. Rajan, 1999. "Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking," NBER Working Papers 7430, National Bureau of Economic Research, Inc.
  5. 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.
  6. Abhijit Sen Gupta, 2008. "Cost of Holding Excess Reserves - The Indian Experience," Finance Working Papers 22165, East Asian Bureau of Economic Research.
  7. Jean Tirole, 2003. "Inefficient Foreign Borrowing: A Dual- and Common-Agency Perspective," American Economic Review, American Economic Association, vol. 93(5), pages 1678-1702, December.
  8. Barry Eichengreen & Ashoka Mody, 2004. "Do Collective Action Clauses Raise Borrowing Costs?," Economic Journal, Royal Economic Society, vol. 114(495), pages 247-264, 04.
  9. Misa Tanaka, 2005. "Bank loans versus bond finance: implications for sovereign debtors," Bank of England working papers 267, Bank of England.
  10. Jeronimo Zettelmeyer & Federico Sturzenegger, 2005. "Haircuts; Estimating Investor Losses in Sovereign Debt Restructurings, 1998-2005," IMF Working Papers 05/137, International Monetary Fund.
  11. Hyun Song Shin & Prasanna Gai & Simon Hayes, 2001. "Crisis costs and debtor discipline: the efficacy of public policy in sovereign debt crises," FMG Discussion Papers dp390, Financial Markets Group.
  12. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September.
  13. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
  14. Dani Rodrik, 2006. "The Social Cost of Foreign Exchange Reserves," NBER Working Papers 11952, National Bureau of Economic Research, Inc.
  15. Paolo Mauro & Yishay Yafeh, 2003. "The Corporation of Foreign Bondholders," IMF Working Papers 03/107, International Monetary Fund.
  16. Kenneth Kletzer, 2003. "Sovereign Bond Restructuring; Collective Action Clauses and official Crisis Intervention," IMF Working Papers 03/134, International Monetary Fund.
  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. Federico Weinschelbaum & Jose Wynne, 2004. "Renegotiation, Collective Action Clauses and Sovereign Debt Markets," Working Papers 75, Universidad de San Andres, Departamento de Economia, revised Aug 2004.
  19. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers 1687, C.E.P.R. Discussion Papers.
  20. Jeremy I. Bulow & Kenneth Rogoff, 1986. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  21. 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.
  22. Eichengreen, Barry & Mody, Ashoka, 1999. "Would Collective Action Clauses Raise Borrowing Costs?," CEPR Discussion Papers 2343, C.E.P.R. Discussion Papers.
  23. Marta Ruiz-Arranz & Milan Zavadjil, 2008. "Are Emerging Asia’s Reserves Really Too High?," IMF Working Papers 08/192, International Monetary Fund.
  24. Olivier Jeanne, 2009. "Debt Maturity and the International Financial Architecture," American Economic Review, American Economic Association, vol. 99(5), pages 2135-48, December.
  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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