Sovereign Snake Oil

12 Pages Posted: 6 Jan 2011 Last revised: 25 Dec 2014

See all articles by Anna Gelpern

Anna Gelpern

Georgetown University Law Center

G. Mitu Gulati

Duke University School of Law

Date Written: December 30, 2010


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

Suggested Citation

Gelpern, Anna and Gulati, Gaurang Mitu, Sovereign Snake Oil (December 30, 2010). Law and Contemporary Problems, Forthcoming; American University, WCL Research Paper No. 2011- 05. Available at SSRN:

Anna Gelpern (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

Gaurang Mitu Gulati

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

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