Collective Action Clauses for the Eurozone: An Empirical Analysis

53 Pages Posted: 24 Oct 2011 Last revised: 25 Dec 2014

See all articles by Michael Bradley

Michael Bradley

Duke University - Fuqua School of Business

G. Mitu Gulati

Duke University School of Law

Date Written: March 28, 2013

Abstract

One of the primary policy initiatives instituted in response to the Eurozone sovereign debt crisis is a requirement that all Eurozone sovereign bonds issued after January 1, 2013 include provisions referred to as Collective Action Clauses or CACs. These CACs are intended to enable an orderly restructuring of distressed sovereign debt by allowing for a super-majority of creditors to impose restructuring terms on minority holdouts. This paper assesses the likely effect of this proposal on the borrowing costs of Eurozone countries. Economic theory makes ambiguous predictions: on the one hand, making debt easier (cheaper) to restructure could increase the propensity of governments to borrow irresponsibly, which would increase the cost of capital; on the other hand, if restructurings proceed more smoothly, creditors will receive a settlement more quickly, which would reduce the cost of capital. Since this is ultimately an empirical issue, we have assembled a database consisting of over 900 sovereign bonds, issued by more than 75 countries, from 1990 through 2010. Relying on this database we demonstrate that the majority of the existing literature is based on inadequate or inappropriate data, which has led researchers to conclude that the inclusion of a CAC either has no effect or increases the cost of capital for weaker nations and decreases the cost of capital for stronger ones. In contrast, we find that the presence of CACs leads to a lower, not higher, cost of capital, especially for below-investment grade bonds.

Suggested Citation

Bradley, Michael and Gulati, Gaurang Mitu, Collective Action Clauses for the Eurozone: An Empirical Analysis (March 28, 2013). Available at SSRN: https://ssrn.com/abstract=1948534 or http://dx.doi.org/10.2139/ssrn.1948534

Michael Bradley (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-8006 (Phone)
919-660-7971 (Fax)

Gaurang Mitu Gulati

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

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