Lee Buchheit and G. Mitu Gulati, “Sovereign Bonds and the Collective Will”, Working Paper No. 34, Georgetown University Law Center (March 2002)
Data from the Bondware database; Brady bond data from JP Morgan.
The end-2001 stock data was compiled using Bondware (flow) data on sovereign debt issuance since 1985 and eliminating pre-2001 maturities and post-2001 issuance. JP Morgan data on Brady bond stocks and amortization was used to augment this data. A few bonds were issued under the governing law of multiple jurisdictions. These have been categorized according to the first jurisdiction listed. However, given that this involves only a handful of bonds this is not material to the results. For Argentina data from JP Morgan’s EMBI global was used to replace the dollar denominated portion of the Bondware data, in order to adjust for the June 2001 megaswap. The results were cross-checked with the annual Merrill Lynch publication “The Size and Structure of the World Bond Market” (see table 2). The data are roughly comparable after taking into account that the Bondware data excludes certain Brady-Eurobond swaps (roughly $45 bn) and issuance by quasi-sovereigns such as the Korean Development Bank (would add $12 bn to the stock). The Bondware data is somewhat more comprehensive in its coverage of emerging market countries.
There are two bonds with a remaining maturity of 94 and 95 years respectively.
Note that the sample is restricted to the central government only. The sample is thus smaller than that used in some other studies on CAC’s (e.g. Eichengreen and Mody,”Would Collective Action Clauses Raise Borrowing Costs: An Update and Additional Results”, Policy Research Working Paper no. 2363, World Bank, May, 2000) and may show a somewhat different distribution of bond issuance jurisdictions.
A Fund arrangement was considered to be in place until the arrangement formally expired or was terminated. These data therefore include issuances by members with Fund arrangements that were off-track or precautionary.
In a very small number of cases, sovereign borrowers may have deliberately deleted the conventional restructuring provisions—including provisions allowing the amendment of non-financial terms that are typical in bonds governed by New York law—to send a clear signal of their commitment to meet their payment obligations. However, in most cases, countries have not changed their issuance pattern even as their financial situation has deteriorated. For example, Russia typically used English law for its dollar denominated Eurobonds, and it used English law in the bonds offered in its June 1998 GKO for Eurobond swap.
Eichengreen and Mody, “Bail-ins, Bailouts and Borrowing Costs,” IMF Staff Papers, Volume 47, pp. 155-188 (2001). See also Eichengreen and Mody, “Would Collective Action Clauses Raise Borrowing Costs: An Update and Additional Results”, Policy Research Working Paper No. 2363, World Bank, May 2000.
See Petas and Rahman, “Sovereign Bonds – Legal Aspects that affect Default and Recovery”, Global Emerging Markets – Debt Strategy, Deutsche Bank (May 1999), Tsatsanoris K., “The Effect of Collective Action Clauses on Sovereign Bond Yields”, in Bank for International Settlements, International Banking and Financial Market Developments, Third Quarter, pp.22-23 (1999), Dixon and Wall, “Collective Action Problems and Collective Action Clauses, Bank of England Financial Stability Review (June 2000), and Becker, Richards and Thaicharoen, “Bond Restructuring and Moral Hazard: Are Collective Action Clauses Costly?”, IMF Working Paper WP/01/92 (July 2001).
This evidence is only germane to the use of clauses typical in English law bonds; the market acceptability of more innovative provisions is discussed in the companion paper.
Ukraine and Pakistan’s dollar-denominated international sovereign bonds are also in the EMBI global index and are governed by English law. The index also includes one dollar denominated international bond issued by the Philippines’ Central Bank that is governed by English law.
The Emerging Markets Creditors Associated recently suggested a 95 percent voting threshold in their model provisions for sovereign bonds.
Acting Managing Director’s Report to the IMFC, (4/12/00); IMFC Communiqué, (4/29/01).
See Seminar on Involving Private Sector in the Resolution of Financial Crises—The Restructuring of International Sovereign Bonds—Further Considerations, EBS/02/15 (1/31/02).
Summing Up by the Acting Chairman, Contingent Credit Lines, EBM/00/113, (11/17/00).
The DDSR policy was adopted in May, 1989, phased out in March, 2000.
Similarly, the Extended Fund Facility—another special policy—was established to finance balance of payments problems that arise, inter alia, from “structural maladjustments in production and trade.”
The only other basis for establishing a special repurchase period would be Article V, Section 4, which permits the Fund to establish conditions when enabling a member to make purchases that would result in the Fund’s holdings of the member’s currency exceeding 200 percent of quota. However, given its purposes—to safeguard the Fund’s resources, this provision could only be used to shorten—not lengthen the repurchase period.
The Emerging Markets Creditors Association recently proposed a number of model provisions for sovereign bonds. See a detailed discussion of these proposed provisions in the companion paper.
Because of the principal of uniformity of treatment, the Fund could not provide financing for an enhancement that was targeted only at “first movers.”
Rule 144A under the Securities Act provides a safe harbor against the registration requirements of the Act for secondary sales of unregistered securities to Qualified Institutional Buyers.