Do Enhanced Collective Action Clauses Affect Sovereign Borrowing Costs?

This paper analyzes the effects of including collective action clauses (CACs) and enhanced CACs in international (nondomestic law-governed) sovereign bonds on sovereigns’ borrowing costs, using secondary-market bond yield spreads. Our findings indicate that inclusion CACs, introduced August 2014, is associated with lower costs for both noninvestment-grade investment-grade issuers. These results suggest market participants do not associate use borrowers’ moral hazard, but instead consider their implied benefits an orderly efficient debt resolution process case restructuring.