What CACs Lack

Dec 8, 2003

Heralded as a breakthrough in the sovereign debt restructuring debate, agreements between debtors and creditors still need fine-tuning.

Mexico has issued five bonds this year featuring clauses intended to help coordinate bondholders’ demands in the event of a debt restructuring. Mexico was the first borrower to use these so-called collective action clauses (CACs) when it sold a $1 billion global bond in March led by JP Morgan and Goldman Sachs. At the time, the issue was welcomed with great fanfare for advancing the debate over improving the sovereign debt restructuring process - and for burying an attempt by the International Monetary Fund to create a sovereign debt restructuring mechanism (SDRM), an international bankruptcy court for governments.

At first, Mexican authorities were wary about collective action clauses. Mexico is one of Latin America’s three investment grade issuers and although the risk of default is remote, government officials were convinced that markets would surely demand a premium for the new-style bonds. “We were reluctant initially to engage in [CACs],” says Mexican Central Bank President Guillermo...

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