Does Strengthening Collective Action Clauses (CACs) Help?

Ghosal, Sayantan; Thampanishvong, Kannika

doi:10.2139/ssrn.993477

Download This Paper

Open PDF in Browser

Add Paper to My Library

Does Strengthening Collective Action Clauses (CACs) Help?

CDMA Working Paper No. 07/11

40 Pages Posted: 14 Jun 2007 Last revised: 21 Oct 2007

See all articles by Sayantan Ghosal

Sayantan Ghosal

University of Warwick - Department of Economics; University of Glasgow - Adam Smith Business School

Kannika Thampanishvong

University of St. Andrews

Date Written: October 2007

Abstract

We study the effect of strengthening CACs in a debt rollover model of a sovereign debt crisis. Conditional on default, there are multiple equilibria: the impact of strengthening CACs depends critically on the prevailing equilibrium. For a subset of equilibria, (i) given a fixed number of creditors, we derive an optimal CAC threshold and (ii) given a fixed CAC threshold, as the number of creditors becomes larger, we show a convergence to efficient information aggregation. Moreover, strengthening CACs may actually increase the ex ante probability of adverse shock. Our analysis makes the case for a formal sovereign bankruptcy procedure.

Keywords: Sovereign Debt, Bargaining, Coordination, Moral Hazard, Collective Action Clauses

JEL Classification: C72, C78, D82, F34

Suggested Citation: Suggested Citation

Ghosal, Sayantan and Ghosal, Sayantan and Thampanishvong, Kannika, Does Strengthening Collective Action Clauses (CACs) Help? (October 2007). CDMA Working Paper No. 07/11, Available at SSRN: https://ssrn.com/abstract=993477 or http://dx.doi.org/10.2139/ssrn.993477