Restructuring Sovereign Bonds: Holdouts, Haircuts and the Effectiveness of Cacs

60 Pages Posted: 16 Jan 2020

See all articles by Julian Schumacher

Julian Schumacher

European Central Bank (ECB)

Christoph Trebesch

Kiel Institute for the World Economy; Centre for Economic Policy Research (CEPR)

Chuck Fang

The Wharton School

Date Written: January, 2020

Abstract

Sovereign debt crises are difficult to solve. This paper studies the “holdout problem”, meaning the risk that creditors refuse to participate in a debt restructuring. We document a large variation in holdout rates, based on a comprehensive new dataset of 23 bond restructurings with external creditors since 1994. We then study the determinants of holdouts and find that the size of creditor losses (haircuts) is among the best predictors at the bond level. In a restructuring, bonds with higher haircuts see higher holdout rates, and the same is true for small bonds and those issued under foreign law. Collective action clauses (CACs) are effective in reducing holdout risks. However, classic CACs, with bond-by-bond voting, are not sufficient to assure high participation rates. Only the strongest form of CACs, with single-limb aggregate voting, minimizes the holdout problem according to our simulations. The results help to inform theory as well as current policy initiatives on reforming sovereign bond markets.

Keywords: creditor coordination, debt restructuring, international financial architecture, sovereign default

JEL Classification: F34, G15, H63, K22

Suggested Citation

Schumacher, Julian and Trebesch, Christoph and Fang, Chuck, Restructuring Sovereign Bonds: Holdouts, Haircuts and the Effectiveness of Cacs (January, 2020). ECB Working Paper No. 2366. Available at SSRN: https://ssrn.com/abstract=3519925

Julian Schumacher (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Christoph Trebesch

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Chuck Fang

The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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