Does Strengthening Collective Action Clauses (CACs) Help?
We study the effect of strengthening CACs in a debt rollover model of a sovereign debt crisis. Conditional on default, there are multiple equilibria: the impact of strengthening CACs depends critically on the prevailing equilibrium. For a subset of equilibria, (i) given a fixed number of creditors, we derive an optimal CAC threshold and (ii) given a fixed CAC threshold, as the number of creditors becomes larger, we show a convergence to efficient information aggregation. Moreover, strengthening CACs may actually increase the ex ante probability of adverse shock. Our analysis makes the case for a formal sovereign bankruptcy procedure.
|Date of creation:||15 Jun 2007|
|Date of revision:||15 Oct 2007|
|Note:||This paper was previously circulated with the title â€˜Bargaining, Moral Hazard and Sovereign Debt Crisisâ€™.|
|Contact details of provider:|| Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL|
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