Collective Action Clauses: How Do They Weigh on Sovereigns?

51 Pages Posted: 21 Feb 2013

Date Written: January 30, 2013

Abstract

We study the effects of the adoption of collective action clauses (CACs) on government bond yields by exploiting secondary market data on sovereigns quoted in international markets from March 2007 to April 2011. CACs are assessed security by security. Using a panel data approach, we find a U-shaped effect of CACs on yields according to credit rating of the issuer. While the impact is negligible for the highest ratings, there emerges a significant yield discount for mid-ratings, which is smaller for bad ratings and possibly insignificant for the worst ratings. The relationship appears fairly robust across a number of robustness checks. This evidence may reflect the fact that CACs are valuable as they help orderly restructuring unless the perceived probability of default is too small. Nevertheless, at low ratings this relevance can be weakened by an increasing moral hazard risk.

Keywords: Collective Action Clauses (CACs), sovereign yields, debt restructuring, default, panel data

JEL Classification: F34, G15, H63

Suggested Citation

Bardozzetti, Alfredo and Dottori, Davide, Collective Action Clauses: How Do They Weigh on Sovereigns? (January 30, 2013). Bank of Italy Temi di Discussione (Working Paper) No. 897, Available at SSRN: https://ssrn.com/abstract=2221852 or http://dx.doi.org/10.2139/ssrn.2221852

Alfredo Bardozzetti

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Davide Dottori (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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