Do Collective Action Clauses Raise Borrowing Costs?

Barry Eichengreen and Ashoka Mody

Economic Journal, 2004, vol. 114, issue 495, 247-264

Abstract: We compare launch spreads on emerging-market bonds subject to UK governing law, which typically include collective action clauses, with spreads on bonds subject to US law, which do not. Collective-action clauses reduce the cost of borrowing for more creditworthy issuers, who appear to benefit from the ability to avail themselves of an orderly restructuring process. Less creditworthy issuers, in contrast, pay higher spreads. It appears that for less creditworthy borrowers the advantages of orderly restructuring are offset by the moral hazard and default risk associated with the presence of renegotiation-friendly loan provisions. We draw out the implications for the debate over whether to encourage the wider utilisation of these provisions as part of the effort to strengthen the international financial architecture. Copyright 2004 Royal Economic Society.

Date: 2004
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