A People's History of Collective Action Clauses

47 Pages Posted: 9 Nov 2012 Last revised: 25 Dec 2014

See all articles by Mark C. Weidemaier

Mark C. Weidemaier

University of North Carolina School of Law

Mitu Gulati

University of Virginia School of Law

Date Written: November 7, 2012


For two decades, collective action clauses (CACs) have been part of the official-sector response to sovereign debt crisis, justified by claims that these clauses can help prevent bailouts and shift the burden of restructuring onto the private sector. Reform efforts in the 1990s and 2000s focused on CACs. So do efforts in the Eurozone today. CACs have even been suggested as the cure for the US municipal bond market. But bonds without CACs are still issued in major markets, so reformers feel obliged to explain why they know better. Over time, a narrative has emerged to justify pro-CAC reforms. It relies on history and portrays CACs as novel solutions to previously-unappreciated coordination problems among bondholders. But this pro-CAC narrative is based on flawed premises. In this article, we trace the use of CACs in sovereign bonds during the 20th century. We show that CACs have been used for much of that time, although often in forms (such as trustee and collective acceleration clauses) that are no longer central to modern reform debates (which focus on modification clauses). Market participants have long been aware of CACs but did not view them as a necessary part of sovereign bond documentation. Indeed, we recount one episode in which sovereign debt was restructured without anyone seeming to notice that the relevant debt already included CACs. Contracts do not always include the optimal terms, and, at the margins, the sovereign debt markets might perform better if all bonds contained CACs. But if CACs are to be a central part of reform agendas, they should be defended on functional grounds rather than on contestable historical ones.

Keywords: sovereign debt, collective action clauses, contracts, Eurozone

JEL Classification: F34

Suggested Citation

Weidemaier, Mark C. and Gulati, Mitu, A People's History of Collective Action Clauses (November 7, 2012). UNC Legal Studies Research Paper No. 2172302, Available at SSRN: https://ssrn.com/abstract=2172302 or http://dx.doi.org/10.2139/ssrn.2172302

Mark C. Weidemaier (Contact Author)

University of North Carolina School of Law ( email )

Van Hecke-Wettach Hall, 160 Ridge Road
CB #3380
Chapel Hill, NC 27599-3380
United States
919.843.4373 (Phone)

Mitu Gulati

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

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