Do Collective Action Clauses Influence Bond Yields? New Evidence from Emerging Markets

This paper provides new empirical evidence relevant to the debate over the desirability of reforms to the way that financial markets and the international community deal with sovereign debt crises. In particular, given the ongoing opposition of investors and some sovereigns to greater use of collective action clauses (CACs) in emerging market bonds, we present new evidence on the way that financial markets have priced the use or non-use of CACs. We supplement existing evidence that the use of CACs in Euromarket issues has not affected yields on new bond issues through an event study that shows that decisions by issuers to change away from, or to, the use of CACs has also not affected the pricing of issuers’ existing stock of debt in the secondary market. We also provide new evidence on the pricing of a large sample of bonds in the secondary market on 31 January 2003. The data show that even after the intense debate about sovereign debt restructuring through 2002, the inclusion or absence of CACs still had no economically or statistically significant impact on yields as of early 2003. Hence we conclude that investors still had not focused on which bonds have CACs, or that they believe that the inclusion of CACs is not relevant to the pricing of debt. The empirical evidence therefore suggests there is no good reason why there cannot be greater use of CACs, including in bonds sold into the US market. A strong case can be made that investors will benefit from well-targeted reforms to the way that sovereign debt crises are handled. Indeed, Mexico’s successful sale of global bonds with CACs on 26 February 2003 – the first placement of bonds with CACs by an emerging market sovereign into the US market – suggests that the long-held opposition to CACs in some quarters may be easing.