NCPA - National Center for Policy Analysis

Collective Action Clauses Hurt Those They Try To Help

May 18, 2000

In an effort to give emerging nations a better way to restructure debt, several key policy makers have suggested adding collective action clauses to bonds with the goal of lowering borrowing costs. Collective action clauses allow a majority of bondholders to alter bond repayment schedules, while unanimous consent is required to change bond payments without these contractual clauses. The change would allow debt restructuring without expensive international rescue packages for developing countries experiencing a sudden outflow of capital.

However, a study of recent collective-action British bonds and non-collective action American bonds found that collective action clauses are counterproductive.

After adding collective action clauses:

  • Interest rates for credit-worthy nations (such as the U.S. and Canada) on average were lower by half a percent.
  • Interest rates for less credit-worthy nations (often the poorer nations) on average increased by one and a half percent.

Researchers believe that lenders are more wary of lending to risky nations now that the clauses exist, thus raising the costs of lending. Poorer nations are protesting these collective action clauses for this reason.

Source: Barry Eichengreen and Ashoka Mody, "Would Collective Action Clauses Raise Borrowing Costs?" National Bureau of Economic Research, January 2000.

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