The benefits of reducing holdout risk: evidence from the Euro CAC experiment, 2013–2018

Abstract

The introduction of collective action clauses in advanced economies' sovereign bonds is an understudied phenomenon. An important concern is whether these clauses produce segmentation, pushing apart the price of those bonds issued with and without collective action clauses (CACs). This paper uses the introduction in 2013 of mandatory two-limb CACs in euro area sovereign bonds issued under domestic law to evaluate the price impact of these provisions. In the euro area, bonds with CACs trade at a small premium. On average for those bonds, yields were up to six basis points lower. This average, however, masks heterogeneity. While Germany and Netherlands have not seen a sustained reduction in borrowing costs, in Italy and Spain the effect has been large (between five and ten basis points). These findings support the argument that the introduction of euro CACs in domestic law bonds helped investors reassess the risks associated with those instruments in both countries.

Sovereign Eurobond Liquidity and Yields

“…The inclusion of an enhanced CAC had a negative but statistically insignificant effect on yields of bonds issued by lower-rated countries. Broadly similar results were obtained by Becker et al (2003), Richards and Gugiatti (2003), Bardozzetti and Dottori (2014), and for European issues by Carletti et al (2018) and Picarelli et al (2018). Eichengreen and Mody (2004), based on data from an earlier period, conclude that CACs may reduce the cost of borrowing for more creditworthy issuers, but increase them for less creditworthy borrowers.…”

How could a new universal code of conduct prevent and resolve sovereign debt crises? Proposals for design and implementation

“…Majority clauses, for instance, approve a qualified majority of bondholders to include minorities in contract modifications. In this way, agreed restructuring conditions are enforced and mitigate the risk that minorities will block it (Bardozzetti & Dottori, 2014;Ghosal & Thampanishvong, 2013;Häseler, 2009;IMF, 2014IMF, , 2003bPicarelli et al, 2019;Schwarcz, 2015). One weakness of these clauses was that they only partly dealt with collective action problems because majority votes have to be taken for each bond issuance (IMF, 2014).…”

“…Majority clauses, for instance, approve a qualified majority of bondholders to include minorities in contract modifications. In this way, agreed restructuring conditions are enforced and mitigate the risk that minorities will block it (Bardozzetti & Dottori, 2014; Ghosal & Thampanishvong, 2013; Häseler, 2009; IMF, 2014, 2003b; Picarelli et al., 2019; Schwarcz, 2015).…”

The Imf's Role in Sovereign Debt Restructurings

“…34 The bottom line seems cautiously positive and promising. Over 98% of creditors consented to the Ecuador debt exchange, resulting 32 On price effects, see Bardozetti and Dottori (2014), Bradley and Gulati (2014), Picarelli et al (2019), Grosse Steffen et al (2019), Carletti et al (2021), and Chung and Papaioannou (2020). A notable study by Fang et al (2021) finds that CACs do help to reduce holdout rates, especially for bonds with high haircuts.…”