Collective Action Clauses for the Eurozone: An Empirical Analysis Michael Bradley & Mitu Gulati1 March 19, 2012 // Greece’s recent actions in retrofitting Aggregation clauses into its local-law bonds that made its restructuring among the easiest (and most brutal) sovereign restructurings of private sector debt that has ever been done

Collective Action Clauses for the Eurozone:
An Empirical Analysis
Michael Bradley & Mitu Gulati1
Second Draft
March 19, 2012
1 Duke University. Thanks to Fridrik Mar Baldursson, Lee Buchheit, Lachlan Burn, Anna Gelpern, Simone
Gervais, Patrick Kenadjian, Yan Liu, Richard Portes, Manju Puri, Robert Rasmussen, David Sabel, Steven
Schwarcz, Frank Smets, John Taylor, Mark Weidemaier, Vish Vishwanathan, Jeromin Zettelmeyer and
workshop participants at Bruegel, Duke, USC and the University of Reykjavik for comments. Thanks also
to Irving De Lira Salvatierra, Keegan Drake and Tori Simmons for excellent research assistance.
2
Abstract
Among the policy initiatives announced by European politicians to tackle the current sovereign debt crisis
is a requirement that all Eurozone sovereign bonds issued in 2013 and thereafter include a set of new
contract provisions. These provisions, referred to as Collective Action Clauses or CACs, are aimed at
enabling an orderly restructure of financially distressed sovereign debt, thereby reducing the need for
taxpayer-funded bailouts. However making restructurings easier and cheaper could potentially increase the
propensity of governments to borrow irresponsibly. If so, mandating the inclusion of such clauses might
increase borrowing costs, especially for sovereigns in the weakest financial condition. By examining the
historical relation between CACs and yields on bonds written under New York and English law, we attempt
to shed light on what would be the effect of including CACs in all Eurozone sovereign bonds. Our general
finding is that, contrary to previous research and common belief, CACs are associated with lower rates for
sovereigns that are in the weakest financial condition. We provide some possible explanations for this
seemingly counter intuitive result.


S 80
Greece’s recent actions in retrofitting Aggregation clauses into its local-law bonds that
made its restructuring among the easiest (and most brutal) sovereign restructurings of
private sector debt that has ever been done perhaps confirm that creditors were right to
demand a premium for lending in local law bonds (Gulati & Zettelmeyer, 2012).

http://www.law.yale.edu/documents/pdf/cbl/CACs_-_March_20_2012.pdf