Do Enhanced Collective Action Clauses Affect Sovereign Borrowing Costs?
IMF Working Papers, August 7, 2020
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- Do Enhanced Collective Action Clauses Affect Sovereign Borrowing Costs?
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Bibliographic details
- Authors: Kay Chung, Michael G. Papaioannou
- Published: August 7, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513526843.001
Overview
- Research question: Effects of including collective action clauses (CACs) and enhanced CACs in international (nondomestic law-governed) sovereign bonds on sovereigns’ borrowing costs.
- Empirical approach: Analysis uses secondary-market bond yield spreads.
- Context note: Enhanced CACs were introduced in August 2014.
Key Findings
- Inclusion of enhanced CACs is associated with lower borrowing costs for both noninvestment-grade and investment-grade issuers.
- Market interpretation: Results indicate market participants do not associate the use of CACs and enhanced CACs with borrowers’ moral hazard.
- Market interpretation (alternative): Market participants consider CACs’ implied benefits of an orderly and efficient debt resolution process in case of restructuring.
Implications for Markets and Policy
- Enhanced CACs can be seen as reducing sovereign borrowing costs across credit categories (noninvestment-grade and investment-grade).
- Adoption of enhanced CACs may improve market perceptions about debt-restructuring processes and reduce perceived creditor losses from disorderly restructurings.
- Policy takeaway: Including enhanced CACs in international sovereign bonds supports market functioning by signaling stronger mechanisms for orderly and efficient debt resolution.
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