Skip to main content
SpringerLink
Log in

Trustees versus fiscal agents and default risk in international sovereign bonds

  • Published:
European Journal of Law and Economics Aims and scope Submit manuscript

Abstract

Over the last 10 years, organisations such as the IMF have launched several initiatives to change market practice with respect to sovereign bond contract drafting 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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4

Similar content being viewed by others

Notes

  1. For potential reasons for the delayed market reaction, see Gelpern and Gulati (2007) and Häseler (2009).

  2. Gugiatti and Richards (2004) and Gelpern and Gulati (2008) document a number of sovereign bond contracts from before 2003 that include CACs despite being governed by New York law.

  3. To erase the doubts about the admissibility of CACs under German law (Häseler 2009), a reform of the Schuldverschreibungsgesetz (indenture law) was enacted on August 5th, 2009. Whether or not there will be any impact on market practice is difficult to say because only a single bond has been issued under German law since 2004, according to the dataset used in this study.

  4. In correspondence with the author, Michael Chamberlin, Executive Director of the Emerging Markets Traders Association, said, “My personal view is that market discipline and individual rights of action are important protections for investors.”

  5. See, for example, Horn (1972), Smart (1982), Goodall (1983), Pergam (1985b, c), Herbert (1987), Buchheit and Gulati (2002), Häseler (2008, 2009).

  6. See Horn (1972) and Herbert (1987) on the nomenclature of, and interaction between, fiscal agent and trustee when both are present in a sovereign bond issue.

  7. As Michael Chamberlin said in correspondence with the author: “Trustees are notable for their caution, occasional incompetence and being subject to institutional constraints (need indemnities, may have conflicts of interest or be subject to political suasion) that make them less effective as litigants than individual holders.” See also Goodall (1983, p. 2): “[I]nvestors often complain that trustees do not act positively enough.” Buchheit and Gulati (2009) document the case of a “bovinely passive trustee” who failed to safeguard creditor rights in Ecuador’s recent default in 2008.

  8. Buchheit and Gulati (2009) provide an account of Ecuador’s said default, which was clearly not of the distress type.

  9. These arguments are developed more fully in Häseler (2008).

  10. Bloomberg’s definition of “international” refers to the bonds that are issued on non-domestic markets. For the purpose of this study and throughout the literature, “international” means that the bonds are governed by laws other than those of the issuing country. Adjustments were made to account for the difference in definitions.

  11. Besides Bondware, Bloomberg is the standard source of bond information in the literature. Becker et al. (2001) and Gugiatti and Richards (2003) obtain details such as governing law and ratings from Bloomberg. All data is available upon request.

  12. For example, Becker et al. (2001) use only bonds from countries rated A1/A+ or below.

  13. If the markets care about such subtle differences in contract terms, they will be aware of them, given the coverage in trade publications (Buchheit 2007). The impact of this re-coding on the subsequent regressions is, however, negligible because at most two of such bonds carry sufficient information to be included in any given regression.

  14. This refers to all bonds issued between 2000 and 2008 whose governance structure could be ascertained.

  15. See, for example, Liu (2002) or Group of Ten (2002). According to Horn (1972), trustees do exist under German law, but their functions are much more limited than under English or New York law.

  16. Virtually all publications on collective action clauses contain global statements such as these, for example Liu (2002), IMF (2002, 2003), and Gugiatti and Richards (2003).

  17. This includes the papers by Tsatsaronis (1999), Eichengreen and Mody (2000), and Becker et al. (2001).

  18. Gugiatti and Richards (2004) and Häseler (2009) remark that the correlation between governing law and CACs is less than perfect.

  19. The most important contributions to that literature are discussed in Häseler (2009).

  20. Becker et al. (2001) omit such ‘exotic’ bonds from the sample. It is probably best to include them as long as their particularities can be reasonably well modelled.

  21. The spread on a bond in default, tautologically, does not reflect default risk. Such bonds are therefore excluded from this part of the analysis.

  22. Thanks to Daniel Rubinfeld for suggestion this approach. Strictly speaking, though, the probability of being in default at the time of download is again only an approximation of the probability of default, or in other words, of being in default at any point during the bond’s life. The two concepts are equivalent only if the time spent in default does not differ systematically across different groups of bonds. But since the probability of default and the time spent in default are both ‘bads’, the distinction is not that crucial from a policy perspective.

  23. Michael Chamberlin in correspondence with the author.

References

  • Becker, T., Richards, A., & Thaicharoen, Y. (2001). Bond restructuring and moral hazard: Are collective action clauses costly? IMF Working Paper, July.

  • Beford, P. (2005). Sovereign bond contracts: A workshop at the Bank of England. Financial Stability Review, 18(6), 101–105.

    Google Scholar 

  • Bradley, M., Fox, J. D., & Gulati, G. M. (2008). The market reaction to legal shocks and their antidotes: Lessons from the sovereign debt market. Duke Law School Legal Studies Research Paper No. 211.

  • Buchheit, L. C. (2007). Supermajority control wins out. International Financial Law Review, 26(4), 2.

    Google Scholar 

  • Buchheit, L. C., & Gulati, G. M. (2002). Sovereign bonds and the collective will. Emory Law Journal, 51, 1317.

    Google Scholar 

  • Buchheit, L. C., & Gulati, G. M. (2009). The coroner’s inquest. International Financial Law Review, 29(9), 22–25.

    Google Scholar 

  • Buchheit, L. C., & Karpinski, E. (2006). Grenada’s innovations. Journal of International Banking and Regulation, 4, 227.

    Google Scholar 

  • Chamberlin, M. M. (2002). Revisiting the IMF’s Sovereign Bankruptcy proposal and the quest for more orderly sovereign work-outs. Remarks at the conference ‘Sovereign Debt Workouts: Hopes and Hazards’ Institute for International Economics, Washington, DC.

  • Drage, J., & Hovaguimian, C. (2004). Collective action clauses (CACS): An analysis of provisions included in recent sovereign bond issues. Financial Stability Review, Bank of England, Nov.

  • Eichengreen, B., & Mody, A. (2000). Would collective action clauses raise borrowing costs? An update and additional results. http://www.ideas.repec.org/p/cdl/ciders/1008.html.

  • Fisch, J. E., & Gentile, C. M. (2004). Vultures or vanguards? The role of litigation in sovereign debt restructuring. Emory Law Journal, 53, 1047.

    Google Scholar 

  • Gelpern, A., & Gulati, G. M. (2007). Public symbol in private contract: A case study. Washington University Law Quarterly, 84, 1627–1715.

    Google Scholar 

  • Gelpern, A., & Gulati, G. M. (2008). Innovation after the revolution: Foreign sovereign bond contracts since 2003. Capital Markets Law Journal, 4(1), 85–103.

    Article  Google Scholar 

  • Goodall, C. P. (1983). Eurobonds issued with the benefits of trust deeds. International Financial Law Review, 2, 19.

    Google Scholar 

  • Group of Ten. (1996). The resolution of sovereign liquidity crises. Bank for International Settlements, http://www.bis.org/publ/gten03.pdf.

  • Group of Ten. (2002). Report of the G-10 working group on contractual clauses. Bank for International Settlements, http://www.bis.org/publ/gten08.htm.

  • Gugiatti, M., & Richards, A. (2003). Do collective action clauses influence bond yields? New evidence from emerging markets. International Finance, 6(3), 415–447.

    Article  Google Scholar 

  • Gugiatti, M., & Richards, A. (2004). The use of collective action clauses in New York law bonds of sovereign borrowers. Georgetown Journal of International Law, 35(4), 815–836.

    Google Scholar 

  • Häseler, S. (2008). Individual enforcement rights in international sovereign bonds. http://www.bepress.com/gwp/default/vol2010/iss1/art1/current_article.html.

  • Häseler, S. (2009). Collective action clauses in international sovereign bond contracts—Whence the opposition? Journal of Economic Surveys, 23(5), 882–923.

    Article  Google Scholar 

  • Herbert, A. (1987). Why have a trustee for a eurobond issue? Journal of International Banking Law, 2(1), 1–2.

    Google Scholar 

  • Horn, N. (1972). Das Recht der Internationalen Anleihen. Frankfurt/Main: Athenäum Verlag.

    Google Scholar 

  • International Monetary Fund. (2002). Collective action clauses in sovereign bond contracts—Encouraging greater use. http://www.imf.org/external/np/psi/2002/eng/060602a.pdf.

  • International Monetary Fund. (2003). Collective action clauses: Recent developments and issues. http://www.imf.org/external/np/psi/2003/032503.pdf.

  • Liu, Y. (2002). Collective action clauses in international sovereign bonds. IMF Working Paper, http://www.imf.org/external/np/leg/sem/2002/cdmfl/eng/liu.pdf.

  • Pergam, A. S. (1985a). Eurocurrency credits: Legal questions and documentation. In N. Horn (Ed.), Adaptation and renegotiation of contracts in international trade and finance. Deventer, Netherlands: Kluwer.

    Google Scholar 

  • Pergam, A. S. (1985b). Eurobonds: Trustees, fiscal agents and the treatment of default. In N. Horn (Ed.), Adaptation and renegotiation of contracts in international trade and finance. Deventer, Netherlands: Kluwer.

    Google Scholar 

  • Pergam, A. S. (1985c). Choosing between the trustee and fiscal agent for Eurobonds. International Financial Law Review, 4(9), 8–11.

    Google Scholar 

  • Portes, R. (2003). Resolution of sovereign debt crises: The new old framework. http://www.ideas.repec.org/p/cpr/ceprdp/4717.html.

  • Smart, A. M. H. (1982). Fiscal agency or trust deed? International Financial Law Review, 1, 18–19.

    Google Scholar 

  • Tsatsaronis, K. (1999). The effect of collective action clauses on sovereign bond yields. In International banking and financial market developments, Bank for International Settlements, http://www.bis.org/publ/r_qt9911.pdf.

Download references

Acknowledgments

I am indebted for support to Hans-Bernd Schäfer, Thomas Eger, Robert Cooter, and to the German Academic Exchange Service. Thanks for help and comments go to Richard Buxbaum, Barry Eichengreen, Mitu Gulati, Ashoka Mody, Dan Rubinfeld, Florian Lohff, Sang-Min Park, Stefan Voigt, and in particular to Jan-Philipp Rock, Lee Buchheit and Michael Chamberlin.

Author information

Authors and Affiliations

  1. Institute of Law and Economics, University of Hamburg, Rothenbaumchaussee 36, 20148, Hamburg, Germany

    Sönke Häseler

Authors
  1. Sönke Häseler
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Sönke Häseler.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Häseler, S. Trustees versus fiscal agents and default risk in international sovereign bonds. Eur J Law Econ 34, 425–448 (2012). https://doi.org/10.1007/s10657-010-9208-5

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10657-010-9208-5

Keywords

JEL Classification

Search

Navigation