Do Collective Action Clauses Raise Borrowing Costs?

18 Pages Posted: 19 May 2004

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

Abstract

We compare launch spreads on emerging-market bonds subject to UK governing law, which typically include collective action clauses, with spreads on bonds subject to US law, which do not. Collective-action clauses reduce the cost of borrowing for more creditworthy issuers, who appear to benefit from the ability to avail themselves of an orderly restructuring process. Less creditworthy issuers, in contrast, pay higher spreads. It appears that for less creditworthy borrowers the advantages of orderly restructuring are offset by the moral hazard and default risk associated with the presence of renegotiation-friendly loan provisions. We draw out the implications for the debate over whether to encourage the wider utilization of these provisions as part of the effort to strengthen the international financial architecture.

Suggested Citation

Eichengreen, Barry and Mody, Ashoka, Do Collective Action Clauses Raise Borrowing Costs?. Economic Journal, Vol. 114, No. 495, pp. 247-264, April 2004. Available at SSRN: https://ssrn.com/abstract=526825

Barry Eichengreen (Contact Author)

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ashoka Mody

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-9617 (Phone)
202-589-9617 (Fax)

HOME PAGE: http://www.amody.com

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