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| Author: | Eichengreen, B. Mody, A. |
| Title: | Do collective action clauses raise borrowing costs? |
| Journal: | Economic Journal
2004 : APR, VOL. 114:495, p. 247-264 |
| Index terms: | Stock markets Finance International Bonds Loans Moral hazard Legislation United Kingdom USA |
| Freeterms: | Collective action |
| Language: | eng |
| Abstract: | This paper compares launch spreads on emerging-market bonds subject to U.K. governing law, typically including collective action clauses (hereafter as: coll-a-cl.), with spreads on bonds subject to U.S. law, which do not. Coll-a-cl. reduce the cost of borrowing for more creditworthy issuers (here as: cre-iss.), who appear to benefit from the ability to avail themselves of an orderly restructuring process. In contrast, less cre-iss. 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. The implications are drawn for the debate over whether to encourage the wider utilisation of these provisions as part of the effort to strengthen the international financial architecture. |
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