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Collective action clauses: how do they weigh on sovereigns?

Author

Listed:
  • Alfredo Bardozzetti

    (Bank of Italy)

  • Davide Dottori

    (Bank of Italy)

Abstract

We study the effects of the adoption of collective action clauses (CACs) on government bond yields by exploiting secondary market data on sovereigns quoted in international markets from March 2007 to April 2011. CACs are assessed security by security. Using a panel data approach, we find a U-shaped effect of CACs on yields according to credit rating of the issuer. While the impact is negligible for the highest ratings, there emerges a significant yield discount for mid-ratings, which is smaller for bad ratings and possibly insignificant for the worst ratings. The relationship appears fairly robust across a number of robustness checks. This evidence may reflect the fact that CACs are valuable as they help orderly restructuring unless the perceived probability of default is too small. Nevertheless, at low ratings this relevance can be weakened by an increasing moral hazard risk.

Suggested Citation

  • Alfredo Bardozzetti & Davide Dottori, 2013. "Collective action clauses: how do they weigh on sovereigns?," Temi di discussione (Economic working papers) 897, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_897_13
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2013/2013-0897/en_tema_897.pdf
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    References listed on IDEAS

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    3. Marco Committeri & Francesco Spadafora, 2013. "You never give me your money? Sovereign debt crises, collective action problems, and IMF lending," Questioni di Economia e Finanza (Occasional Papers) 143, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    Collective Action Clauses (CACs); sovereign yields; debt restructuring; default; panel data;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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