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Bond Restructuring and Moral Hazard; Are Collective Action Clauses Costly?

  • Törbjörn I. Becker
  • Anthony J. Richards
  • Yunyong Thaicharoen

Many official groups have endorsed the wider use by emerging market borrowers of contract clauses which allow for a qualified majority of bondholders to restructure repayment terms in the event of financial distress. Some have argued that such clauses will be associated with moral hazard and increased borrowing costs. This paper addresses this question empirically using primary and secondary market yields and finds no evidence that the presence of collective action clauses increases yields for either higher- or lower-rated issuers. By implication, the perceived benefits from easier restructuring are at least as large as any costs from increased moral hazard.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/92.

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Length: 41
Date of creation: 01 Aug 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/92
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  1. Frankel, Jeffrey & Roubini, Nouriel, 2002. "The Role of Industrial Country Policies in Emerging Market Crises," Working Paper Series rwp02-002, Harvard University, John F. Kennedy School of Government.
  2. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
  3. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1989. " LDC Debt: Forgiveness, Indexation, and Investment Incentives," Journal of Finance, American Finance Association, vol. 44(5), pages 1335-50, December.
  4. Eichengreen, Barry & Mody, Ashoka, 1999. "Would Collective Action Clauses Raise Borrowing Costs?," CEPR Discussion Papers 2343, C.E.P.R. Discussion Papers.
  5. Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-89, July.
  6. Chowdhry, Bhagwan, 1991. "What Is Different about International Lending?," Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 121-48.
  7. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," NBER Working Papers 5131, National Bureau of Economic Research, Inc.
  8. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
  9. Joshua Angrist & Alan Krueger, 1998. "Empirical Strategies in Labor Economics," Working papers 98-7, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Eichengreen, Barry & Mody, Ashoka, 1998. "Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?," International Finance, Wiley Blackwell, vol. 1(1), pages 35-57, October.
  11. Michael P. Dooley, 2000. "Can Output Losses Following International Financial Crises be Avoided?," NBER Working Papers 7531, National Bureau of Economic Research, Inc.
  12. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
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