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Collective Action Clauses in International Sovereign Bond Contracts - Whence the Opposition?

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  • Häseler, Sönke

Abstract

In the debate on strengthening the international financial architecture, which peaked in 2002 after a series of emerging market sovereign debt crises, the universal adoption of collective action clauses (CACs) was the most promising reform proposal. Academics and the official sector had been promoting CACs at least since 1995, yet market practice did not begin to change until 2003. This delay is often attributed to the opposition of investors and sovereign borrower to CACs. This paper evaluates the publicly stated as well as the suspected private motives of the two sides to block the spread of CACs. It draws on a wide range of existing evidence and adds some new theoretical considerations to show that there is no reason to be sceptical of CACs unless bailouts exist as an alternative crisis resolution mechanism. This conclusion may be of interest purely for the sake of historical accuracy. But more importantly, it may help to better understand any potential future resistance by market participants, e.g. in the process of introducing CACs in bonds governed by German law.

Suggested Citation

  • Häseler, Sönke, 2007. "Collective Action Clauses in International Sovereign Bond Contracts - Whence the Opposition?," MPRA Paper 6314, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:6314
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    References listed on IDEAS

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    1. Marcus Miller & Dania Thomas, 2007. "Sovereign Debt Restructuring: The Judge, the Vultures and Creditor Rights," The World Economy, Wiley Blackwell, vol. 30(10), pages 1491-1509, October.
    2. 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.
    3. Ghosal, Sayantan & Thampanishvong, Kannika, 2013. "Does strengthening Collective Action Clauses (CACs) help?," Journal of International Economics, Elsevier, vol. 89(1), pages 68-78.
    4. 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.
    5. Stephen Choi & G. Gulati, "undated". "Innovation in Boilerplate Contracts: An Empirical Examination of Sovereign Bonds," University of Southern California Legal Working Paper Series usclwps-1006, University of Southern California Law School.
    6. 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, April.
    7. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(2), pages 289-309.
    8. 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.
    9. Ghosal, Sayantan & Thampanishvong, Kannika, 2013. "Does strengthening Collective Action Clauses (CACs) help?," Journal of International Economics, Elsevier, vol. 89(1), pages 68-78.
    10. Michelle White, 2002. "Sovereigns in Distress: Do They Need Bankruptcy?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(1), pages 287-320.
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    Cited by:

    1. Mitu Gulati, 2013. "The Evolution of Euro Area Sovereign Debt Contract Terms: A Preliminary Examination," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(3), pages 03-09, October.
    2. repec:ces:ifodic:v:11:y:2013:i:3:p:19097380 is not listed on IDEAS
    3. Eger, Thomas, 2011. "Solidarität und Wettbewerb in der Europäischen Union in Zeiten der Finanz- und Verschuldungskrise," Discussion Papers 1/11, Europa-Kolleg Hamburg, Institute for European Integration.
    4. Mitu Gulati, 2013. "The Evolution of Euro Area Sovereign Debt Contract Terms: A Preliminary Examination," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(03), pages 03-09, October.
    5. Alfredo Bardozzetti & Davide Dottori, 2013. "Collective action clauses: how do they weigh on sovereigns?," Temi di discussione (Economic working papers) 897, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    Collective Action Clauses Sovereign Debt Restructuring;

    JEL classification:

    • K3 - Law and Economics - - Other Substantive Areas of Law
    • F3 - International Economics - - International Finance

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