The Price of Law: The Case of the Eurozone Collective Action Clauses
50 Pages Posted: 3 Aug 2016 Last revised: 19 Feb 2019
Date Written: February 16, 2019
We analyze the price effect of the introduction of Collective Action Clauses (CACs) in all newly issued sovereign bonds of Eurozone countries as of January 1, 2013. By allowing a majority of creditors to modify payment obligations, such clauses reduce the likelihood of holdouts while facilitating strategic default by the sovereign. Using a unique matching methodology, we find that CAC bonds trade, in the secondary market, at lower yields than otherwise similar no-CAC bonds. Such yield differential widens in countries with worse ratings and in those with stronger legal systems. The results suggest that Euro CACs are seen as pro-creditor provisions.
Keywords: collective action clauses, sovereign yields, reputation of law
JEL Classification: F33, G12, H63, K12
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