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ORCID

Kay Chung 0000-0003-2810-2132

Michael G. Papaioannou 0000-0003-2420-8319

Keywords

collective action clause; sovereign bond contractual clause; governing law; sovereign debt restructuring; default; bond spreads; sovereign cost of borrowing

Abstract

This paper analyzes the effects of including collective action clauses (CACs) and enhanced CACs in international (nondomestic law-governed) sovereign bonds on sovereigns’ borrowing costs, using secondary-market bond yield spreads. Our findings indicate that inclusion of enhanced CACs, introduced in August 2014, is associated with lower borrowing costs for both noninvestment-grade and investment-grade issuers. These results suggest that market participants do not associate the use of CACs and enhanced CACs with borrowers’ moral hazard, but instead consider their implied benefits of an orderly and efficient debt resolution process in case of restructuring.

Acknowledgments

This paper has been published as an IMF Working Paper, titled Do Enhanced Collective Action Clauses Affect Sovereign Borrowing Costs? (WP/20/162). The views expressed in this paper are those of the authors and should not be attributed to the International Monetary Fund, it’s Executive Board or its management. The authors would like to thank Chanda DeLong, Silvia Domit, Ehsan Ebrahimy, Eleonora Endlich, Aitor Erce, Dennis Essers, Chuck Fang, Mark Flanagan, Rodirogo Garcia-Verdu, Borja Gracia, Daniel Hardy, Xingwei Hu, Thordur Jonasson, Yan Liu, Natalia Novikova, and Eriko Togo for insightful comments and suggestions. This paper was completed in March 2020, using data and information available up to that period. The usual disclaimer applies.

First Page

59

Last Page

87

Page Count

29

Received Date

13 July 2021

Revised Date

28 September 2021

Accept Date

05 October 2021

Online Available Date

22 October 2021

DOI

10.7172/2353-6845.jbfe.2021.1.5

JEL Code

E43; F32; F34; G12

Publisher

University of Warsaw

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