Collective Action Clauses in Sovereign Debt Markets: a Quantitative Analysis

Collective Action Clauses (CACs) are contractual provisions in sovereign bond contracts that allow sovereigns to exit a default by extending a restructuring offer accepted by a qualified majority of bondholders. The terms of the restructuring are thereby binding for dissenting creditors. Over the past two decades, CACs have been increasingly adopted by emerging and European sovereigns. By lowering the costs of default, CACs can exacerbate default incentives and reduce a sovereign's borrowing capacity. By shortening the post-default negotiation period, CACs can entice more creditors to purchase bonds, thereby expanding sovereigns' borrowing capacity. This paper provides a quantification of CACs in a sovereign default model with heterogeneous creditors and endogenous delays in post-default negotiations.