Collective action clauses in the euro area: a law and economic analysis of the first five years

Extract

1. Introduction

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Efforts to reform the international financial architecture towards a regime in which sovereign debt restructurings can be managed in a more ‘orderly’ fashion date back at least to the early 1920s.¹ In very stark terms, two possible models have been proposed: a statutory regime akin to bankruptcy procedures for individuals or companies at the national level or contractual provisions in the underlying bond contracts that clarify the procedure of a potential workout following a default. Concrete policy efforts in recent decades have predominantly focused on the latter model. The contractual provision that has proven to be most appealing to policy-makers and issuers are the so-called collective action clauses (CACs), which have become increasingly prevalent since at least the early 2000s. CACs mandate that if a debt restructuring offer is supported by a supermajority of creditors, it becomes binding on all investors—irrespective of their individual preferences. The goal of these provisions is to prevent individual creditors from freeriding on the debt relief granted by others and to remove the risk of protracted holdout litigation in court.