The Price of Law: The Case of the Eurozone Collective Action Clauses

Abstract

We analyze the price effect of the introduction of Collective Action Clauses (CACs) in all newly issued sovereign bonds of Eurozone countries as of January 1, 2013. By allowing a majority of creditors to modify payment obligations, such clauses reduce the likelihood of holdouts while facilitating strategic default by the sovereign. We find that CAC bonds trade in the secondary market at lower yields than otherwise similar no-CAC bonds. The yield differential widens in countries with worse ratings and in those with stronger legal systems. The results suggest that CACs are seen as pro-rather than anti-creditor provisions. (JEL classifications: F33, G12, H63, K12) "Collective action clauses . . . are really an international provision that is recommended the world over in case of any and all issuances in order to facilitate crisis management; not to take away, not to be in any shape hostile to a country, but to help it."Christine Lagarde, responding to a question about proposed Euro area reforms at the

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

“…In line with the findings in Carletti et al (2018), our evidence shows that the dual-limbed euro CACs reduce borrowing costs; with the caveat that there is heterogeneity across countries.…”

“…Focusing on the euro area CACs, early evidence comes from Steffen and Schumacher (2014) that found no significant effect coming from the euro CAC. In turn, Carletti et al (2018) find that bonds with euro CACs trade at lower yields, and that the quality of the legal system matters for the size of this effect. Countries whose legal system is more efficient feature lower yields in bonds with CACs.…”

“…9 This paper contributes to filling this analytical gap with two separate sets of evidence: one for euro CAC in domestic law issuances and another for ICMA CAC in foreign law issuances. To evaluate the impact of two-limbed CAC structures on euro area governments borrowing costs, we follow the work of Carletti et al (2018). As they do, we combine a matching technique with panel regressions.…”

“…9 According to the findings in Carletti et al (2018) this is the case for issuers with strong legal institutions.…”

“…10 Moreover, thanks to the larger pool of bonds and observations at our disposal, we study country-specific time-varying effects of the CACs. Additionally, while Carletti et al (2018) match bonds with differences in remaining maturities of up to three years, we use an alternative (tighter) matching, with a narrower remaining maturity window (one year) to match the bonds, and also limit the difference between matches as regards coupons (below 5 percent) and original maturity at issuance (not more than ten years difference). 11…”