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COST AND EFFICACY OF COLLECTIVE ACTION CLAUSES

Recent developments in sovereign capital market, such as the debt crises in Eurozone, the massive restructuring by Greece, and the escalated tension between Argentina and its holdout creditors, have brought Collective Action Clauses (CACs) back to limelight. These clauses in sovereign bond contracts are claimed to address the coordination problem among creditors and thus enable a more orderly restructuring process, and previous researches have found little cost of carrying these “insurances” for debtor countries. In this research, I revisit the cost question through a replication method and new evidence made available by the Eurozone CACs mandate, and I examine the actual efficacy of CACs by surveying the 22 sovereign bond restructurings since 1970, on which there has been little empirical analysis as I am aware of. My analysis finds that Euro CACs with the aggregation feature are associated with little but positive addition to borrowing cost, and riskier investments with lower credit rating and longer maturity are subject to higher CACs premium. At the same time, CACs have not significantly affected the outcome of restructurings after controlling for other factors such as creditor structure, haircut, and government coerciveness. This cost-benefit analysis lead me to conclude that although CACs do not lead to substantially higher borrowing cost – even the “Super CACs” with the aggregation feature, including them does not necessarily guarantee a more orderly restructuring, and thus more dramatic reforms may be necessary if further improvement in the restructuring process is desired.