Trustees versus Fiscal Agents and Default Risk in International Sovereign Bonds

Häseler, Sönke (2010): Trustees versus Fiscal Agents and Default Risk in International Sovereign Bonds.

Abstract

Over the last ten years, institutions such as the IMF have launched several initiatives to change market practice with respect to sovereign bond contract drafting in order to ease restructuring after defaults. The first of these, the universal adoption of collective action clauses, was embraced by the market after some hesitation. Another proposal - the more widespread appointment of trustees to represent bondholders in times of crisis, to centralise enforcement action against the debtor and thus to facilitate debt relief - has so far failed to have the desired impact. Amongst other potential reasons for this failure, the argument has been made that to vest enforcement rights in the trustee, as opposed to individual bondholder rights, would be to reduce the deterrence against opportunistic defaults and thus to exacerbate moral hazard. Using a sample of secondary market bond spreads and information on default status, this paper assesses empirically whether sovereign bonds issued under a trust structure indeed carry a higher default risk. It finds no systematic evidence of either a spread premium or higher actual default rates for bonds with collective enforcement rights.

• Item Type: MPRA Paper
• Language: English
• Keywords: trustee; fiscal agent; sovereign bonds; default; moral hazard; collective action clauses
• Subjects: F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; K - Law and Economics > K3 - Other Substantive Areas of Law > K33 - International Law; K - Law and Economics > K1 - Basic Areas of Law > K12 - Contract Law

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