Sovereign Snake Oil

Abstract

Collective Action Clauses (CACs) are back at the forefront of financial crisis response, this time in Europe. In the absence of a sovereign bankruptcy regime, CACs help solve coordination problems in sovereign bonds by binding all bondholders to the terms of a debt restructuring approved by the majority. But unlike the last two campaigns to include CACs in foreign sovereign bonds in the 1990s and early 2000s, today’s initiative does not point to coordination problems. Most of the sovereign bonds at issue either already have CACs or include other features that make restructuring relatively straightforward. Much of the European debt problem stems from private sector debts, which can be restructured in bankruptcy. Moreover, standardized CACs on the model referenced in EU statements fit awkwardly in domestic law bonds, which account for the bulk of the EU sovereign debt problem. Why revive such an ill-fitting remedy? In this essay, we review the recent history of CAC initiatives to suggest that they serve as a convenient political diversion from the hard problems and painful solutions at the heart of a financial crisis. [This is a modified version of the editors' introduction to the LCP volume on the modern history of sovereign debt.]

Keywords: Sovereign Debt, Financial Crisis, Collective Action Clauses, Europe

JEL Classification: F02, F33, F34, F36, G28, H63, K22, K23, K33