Bond Restructuring and Moral Hazard: Are Collective Action Clauses Costly?

Author/Editor:

Torbjorn I. Becker ; Anthony J. Richards ; Yunyong Thaicharoen

Publication Date:

August 1, 2001

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Many official groups have endorsed the wider use by emerging market borrowers of contract clauses which allow for a qualified majority of bondholders to restructure repayment terms in the event of financial distress. Some have argued that such clauses will be associated with moral hazard and increased borrowing costs. This paper addresses this question empirically using primary and secondary market yields and finds no evidence that the presence of collective action clauses increases yields for either higher- or lower-rated issuers. By implication, the perceived benefits from easier restructuring are at least as large as any costs from increased moral hazard.

Series:

Working Paper No. 2001/092

Subject:

Bond yields Bonds Emerging and frontier financial markets Financial institutions Financial markets Financial sector policy and analysis International bonds Moral hazard

English

Publication Date:

August 1, 2001

ISBN/ISSN:

9781451851595/1018-5941

Stock No:

WPIEA0922001

Pages:

41

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