Individual Enforcement Rights in International Sovereign Bonds
27 Pages Posted: 13 Nov 2008 Last revised: 31 Oct 2011
Date Written: November 10, 2008
Sovereign bond contracts are notoriously hard to enforce. The few rights that bondholders have can be vested either collectively or individually. It seems that investors traditionally had a preference for the latter, which hindered financial market reform projects, such as the universal adoption of collective action clauses or trust structures.
This paper discusses theoretically and empirically whether it is indeed in the bondholders’ collective interest to be allowed to individually sue and attach the debtor country’s assets following a default. Market reaction to the landmark case of Elliott Associates v. Peru is tested to assess just how much bondholders actually value individual enforcement rights. It is found that even the single most important event to reinforce creditor rights in recent years provoked no systematic movement in bond prices. We thus conclude that perhaps the importance of individual enforcement rights to the markets has been exaggerated and we therefore recommend ignoring any opposition from market participants that may arise during the necessary transition to more collective enforcement rights.
Keywords: sovereign debt, collective action clauses, fiscal agency agreements, trustees
JEL Classification: G12, F34, K12
Suggested Citation: Suggested Citation