The Euro and the Crisis by Nazaré da Costa Cabral José Renato Gonçalves & Nuno Cunha Rodrigues

Author:Nazaré da Costa Cabral, José Renato Gonçalves & Nuno Cunha Rodrigues
Language: eng
Format: epub
Publisher: Springer International Publishing, Cham

(B) Contractual approach

The use of Collective Action Clauses (“CACs”) in government bonds is a relatively new phenomenon. The idea originated in G-10 group report of May 1996 in the wake of a fundamental shift in government finance, from syndicated bank lending to direct market finance.32 Traditionally international bank lending to sovereigns took the form of loan agreements and debt restructuring was negotiated by bank advisory committees, known as the London Club. More recently, the role of commercial banks in State lending has changed and banks became broker-dealers passing the sovereign default risk to large groups of bondholders, insurance companies, pension funds, investment funds, asset managers et al. The inclusion in sovereign debt instruments of contractual provisions that facilitate consultation and cooperation between debtors and their private creditors, thereby providing adequate contractual conditions for co-ordination among an amalgamate of creditors was seen desirable in the event of crisis.

In 2002, with the Argentinian debt crisis, the IMF recommended the use of CAC for all international sovereign issuers and the idea was adopted in 2003 by the Ecofin Council.33 It was in the wake of the sovereign debt crisis in Europe that in its statement of 28 November 2010, the Eurogroup identified that standardized and identical Collective Action Clauses (“CACs”) should be included, in such a way as to preserve market liquidity, in the terms and conditions of all new euro area government bonds. As requested by the European Council on 25 March 2011, the detailed legal arrangements for including CACs in euro area government securities were finalized by the Economic and Financial Committee (EFC) by 18 November 2011.34

In accordance with paragraph 3 of Article 12 of the modified version of The Treaty establishing the European Stability Mechanism (ESM)—endorsed on 2nd February 2012 by the euro area Member States—it has become mandatory on such Member States to include the Model Collective Action Clauses (CACs) in all new euro area government securities with maturity above 1 year issued on or after 1st January 2013, in a way which ensures that their legal impact is identical.

CACs allow for a proposed modification of euro area government securities to be made binding on all holders of the affected securities if approved by holders of the requisite principal amount of the affected securities, thus facilitating the agreement of private-sector creditors to a possible modification of euro area government debt securities that contain such standardized CAC.35

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