Would Collective Action Clauses Raise Borrowing Costs?

38 Pages Posted: 1 Mar 2000 Last revised: 19 Nov 2022

See all articles by Barry Eichengreen

Barry Eichengreen

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Ashoka Mody

International Monetary Fund (IMF) - Research Department

Date Written: January 2000

Abstract

We examine the implications for borrowing costs of including collective-action clauses in loan contracts. For a sample of some 2,000 international bonds, we compare the spreads on bonds subject to UK governing law, which typically include collective-action clauses, with spreads on bonds subject to US law, which do not. Contrary to the assertions of some market participants, we find that collective-action clauses in fact reduce the cost of borrowing for more credit-worthy issuers, who appear to benefit from the ability to avail themselves of an orderly restructuring process. In contrast, less credit-worthy issuers pay, if anything, higher spreads. We conjecture that for less credit-worthy borrowers the advantages of orderly restructuring are offset by the moral hazard and default risk associated with the presence of renegotiation-friendly loan provisions.

Suggested Citation

Eichengreen, Barry and Mody, Ashoka, Would Collective Action Clauses Raise Borrowing Costs? (January 2000). NBER Working Paper No. w7458, Available at SSRN: https://ssrn.com/abstract=213673

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Ashoka Mody

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