Sovereign Bond Restructuring: Collective Action Clauses and official Crisis Intervention
IMF Working Papers, June 1, 2003
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- Sovereign Bond Restructuring: Collective Action Clauses and official Crisis Intervention
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Bibliographic details
- Authors: Kenneth Kletzer
- Published: June 1, 2003
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451855623.001
Summary
- Compares restructuring of sovereign bonds with and without collective action clauses.
- Concludes that collective action clauses can allow efficient debt renegotiation in a formal model of sovereign debt renegotiation.
- Finds that unanimity rules offer incentives for opportunistic behavior by bondholders that leads to inefficient outcomes.
- With collective action clauses, mutual gains from renegotiation can be internalized by bondholders so holders of each bond issue have incentives to participate in a collective debt restructuring.
- Analysis abstracts from transactions costs; the conclusion about collective action clauses may be sensitive to renegotiation and coordination costs.
Key findings
- Collective action clauses permit efficient debt renegotiation in the formal model used.
- Unanimity rules create incentives for opportunistic bondholder behavior and inefficient outcomes.
- Collective action clauses help internalize mutual gains so each bond-issue holder has incentives to participate in restructuring.
- The analysis does not incorporate transactions costs; sensitivity to renegotiation and coordination costs is explicitly noted.
Policy implications and considerations
- Adoption of collective action clauses can facilitate collective debt restructurings by aligning incentives of bondholders.
- Policymakers should consider the role of transactions, renegotiation, and coordination costs when assessing the practical effectiveness of collective action clauses.
- Unanimity-based provisions may encourage opportunistic holdout behavior and undermine efficient restructuring outcomes.
Methodology and scope
- Uses a formal model of sovereign debt renegotiation.
- Abstracts from transactions costs, implying results may differ when such costs are considered.
Subjects and keywords
- Subjects: Asset and liability management; Bonds; Collective action clauses; Consumption; Debt renegotiation; Financial institutions; Loans; National accounts; Personal income
- Keywords: Bonds; borrower default; borrower income; borrower utility; borrower's consumption; collective action clauses; Debt renegotiation; international financial architecture; lender B; lender B's payoff; lender exit; lender surplus; lender's participation constraint; Loans; low income; participation constraint; Personal income; present value; risk-neutral lender; rollover option; sovereign bond; sovereign debt; WP
Content in this bundle
- Sovereign Bond Restructuring: Collective Action Clauses and Official Crisis Intervention - WP/03/134