## Do Enhanced Collective Action Clauses Affect Sovereign Borrowing Costs?

_IMF Working Papers, August 7, 2020_

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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

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### 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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_Source: https://www.imf.org/en/publications/wp/issues/2020/08/07/do-enhanced-collective-action-clauses-affect-sovereign-borrowing-costs-48960_