Document Type

Working Paper

Publication Date

2012

Keywords

sovereign debt, sovereign bonds, Eurozone, Collective Action Clauses, CACs, bond contracts, bailouts, debt restructuring, empirical research

Subject Category

Banking and Finance | International Law | Law

Abstract

Among the policy initiatives designed to tackle the current sovereign debt crisis in the Eurozone is a requirement that all Eurozone sovereign bonds issued after January 1, 2013 include a set of new contract provisions. These provisions, referred to as Collective Action Clauses or CACs, are intended to enable an orderly restructuring of distressed sovereign debt, thereby reducing the need for third-party bailouts. However, making restructurings easier and cheaper could potentially increase the propensity of governments to borrow irresponsibly. A concern about the new CACs, therefore, is that they will result in increased borrowing costs, particularly for sovereigns in the weakest financial condition. By examining the historical relation between CACs and yields on bonds written under New York and English law, we attempt to shed light on what would be the effect of including CACs in Eurozone sovereign bonds. Contrary to previous research and common belief, we find little evidence that CACs increase the cost of capital. Moreover we find that the reduction in yields is larger for the sovereigns that are in the weakest financial condition.