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Christoph Trebesch
- 15 January 2020
- WORKING PAPER SERIES - No. 2366Details
- Abstract
- Sovereign debt crises are difficult to solve. This paper studies the “holdout problem”, meaning the risk that creditors refuse to participate in a debt restructuring. We document a large variation in holdout rates, based on a comprehensive new dataset of 23 bond restructurings with external creditors since 1994. We then study the determinants of holdouts and find that the size of creditor losses (haircuts) is among the best predictors at the bond level. In a restructuring, bonds with higher haircuts see higher holdout rates, and the same is true for small bonds and those issued under foreign law. Collective action clauses (CACs) are effective in reducing holdout risks. However, classic CACs, with bond-by-bond voting, are not sufficient to assure high participation rates. Only the strongest form of CACs, with single-limb aggregate voting, minimizes the holdout problem according to our simulations. The results help to inform theory as well as current policy initiatives on reforming sovereign bond markets.
- JEL Code
- F34 : International Economics→International Finance→International Lending and Debt Problems
G15 : Financial Economics→General Financial Markets→International Financial Markets
H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt
K22 : Law and Economics→Regulation and Business Law→Business and Securities Law
- 20 June 2018
- WORKING PAPER SERIES - No. 2162Details
- Abstract
- Governments often issue bonds in foreign jurisdictions, which can provide additional legal protection vis-à-vis domestic bonds. This paper studies the effect of this jurisdiction choice on a bond prices. We test whether foreign-law bonds trade at a premium compared to domestic-law bonds. We use the euro area 2006-2013 as a unique testing ground, controlling for currency risk, liquidity risk, and term structure. Foreign-law bonds indeed carry significantly lower yields in distress periods, and this effect rises as the risk of a sovereign default increases. These results indicate that, in times of crisis, governments can borrow at lower rates under foreign law.
- JEL Code
- F34 : International Economics→International Finance→International Lending and Debt Problems
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
K22 : Law and Economics→Regulation and Business Law→Business and Securities Law
- 28 February 2018
- WORKING PAPER SERIES - No. 2135Details
- Abstract
- For centuries, defaulting governments were immune from legal action by foreign creditors. This paper shows that this is no longer the case. Building a dataset covering four decades, we find that creditor lawsuits have become an increasingly common feature of sovereign debt markets. The legal developments have strengthened the hands of creditors and raised the cost of default for debtors. We show that legal disputes in the US and the UK disrupt government access to international capital markets, as foreign courts can impose a financial embargo on sovereigns. The findings are consistent with theoretical models with creditor sanctions and suggest that sovereign debt is becoming more enforceable. We discuss how the threat of litigation affects debt management, government willingness to pay, and the resolution of debt crises.
- JEL Code
- F34 : International Economics→International Finance→International Lending and Debt Problems
G15 : Financial Economics→General Financial Markets→International Financial Markets
H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt
K22 : Law and Economics→Regulation and Business Law→Business and Securities Law