The Evolution of Eurozone Debt Contracts Frank Smets & Mitu - - PowerPoint PPT Presentation

The Evolution of Eurozone Debt Contracts

Frank Smets & Mitu Gulati

The views expressed are our own and not necessarily those of the European Central Bank or its Governing Council.

Question

• How have international debt contract terms

evolved in euro area countries over the past three decades (and after EMU in particular)?

– First step towards analyzing whether yields of sovereign bonds with different contract terms have responded differently to recent news.

Motivation

• From an empirical point of view:

– There is a lot variation in euro area contract terms, which will allow us to empirically investigate the implications.

• From a theoretical point of view:

– Entry of EMU is a bit like a natural experiment – Can help distinguish between theories of why countries choose to issue under certain contract terms

• From a policy perspective:

– EU Heads of State have decided that as of 2013 all euro area contracts will include Collective Action Clauses.

Contract terms

• Maturity
• Currency
• Collateral (e.g negative pledge)
• Collective Action Clauses
• Listing
• Governing Law
• Sovereign Immunity

Theory 1

Commitment versus flexibility (“tying your hands”)

• Contract terms determine how easy/difficult it is to

restructure one’s debt in the event of a big negative shock; (also whether a country can inflate the debt away; whether creditors can “punish” bad behaviour).

• Weak countries that can not credibly commit to
• verborrow will have an incentive to tie their hands

and go for less “flexible” contract terms.

• This is a typical story – stronger firms are able to

negotiate more flexible terms (terms that make restructurings easier)

Theory 2

• The historic logic behind mandating CAC

proposals after Mexican bailout in 1995:

– Reduce the need for/size of bailouts

• Mandatory contract terms are generally

inefficient unless there are externalities (contagion fears):

– Nations agree to terms that make restructurings slow, difficult and expensive; – Because it increases the probability of others to provide bailouts

Impact of entering EMU

• Entering EMU means being fiscally responsible

(SGP) and subscribing to no-bail-out (credibility bonus):

– Predicts a shift towards more flexible contract terms.

• Euro area is an economic and monetary union

where nations are interconnected; (high externalities):

– Predicts a shift towards contract terms making restructurings more difficult (and bailouts more likely)

Data

• 30 years of sovereign debt contracts
• Two sources – Dealogic & Thomson Financial
• 400 plus contracts for six Eurozone periphery

countries: Belgium, Greece, Ireland, Italy, Portugal, Spain (also looking at Austria and Finland)

• We coded terms for Credibility &

Restructuring

New York Lux Total 100 200 300 400 500 600 700 10% 0% 0% 31% 58% 80% 94 288 618

Figure 9B. Changes in Listing in Non-Euro Nations (1980 - May 2011)

New York Lux Total

Local Lux Total 20 40 60 80 100 120 140 160 180 3% 5% 30% 30% 55% 65% 60 172 178

Figure 9A. Changes in Listing in Eurozone Periphery (1980 - May 2011)

Local Lux Total

Data Slides

Negative Pledge Total 100 200 300 400 500 600 700 49% 69% 76% 94 288 618

Figure 1B. Changes in Negative Pledge in Non-Euro Nations (1980 - May 2011)

Negative Pledge Total

Negative Pledge Total 20 40 60 80 100 120 140 160 180 72% 85% 60% 60 172 178

Figure 1A. Changes in Negative Pledge in Eurozone Periphery (1980 - May 2011)

Negative Pledge Total

New York Local English Total 100 200 300 400 500 600 700 19% 35% 53% 2% 1% 6% 33% 38% 39% 94 288 618

Figure 7B. Changes in Governing Law in Non-Euro Nations (1980 - May 2011)

New York Local English Total

New York Local English Total 20 40 60 80 100 120 140 160 180 0% 10% 27% 0% 21% 44% 37% 41% 26% 60 172 178

Figure 7A. Changes in Governing Law in Eurozone Periphery (1980 - May 2011)

New York Local English Total

Conclusions

• Upon EMU entry, nations enjoyed (a) more

credibility and (b) more flexibility in ability to manage debt stock.

• In other words, there was a belief that there

would be no bailout (Maastricht Treaty)

IMF Total 20 40 60 80 100 120 140 160 180 32% 16% 1% 60 172 178

Figure 2A. Changes in IMF in Eurozone Periphery (1980 - May 2011)

IMF Total

IMF Total 100 200 300 400 500 600 700 1% 23% 36% 94 288 618

Figure 2B. Changes in IMF in Non-Euro Nations (1980 - May 2011)

IMF Total

Disenfranchise Total 20 40 60 80 100 120 140 160 180 0% 6% 20% 60 172 178

Figure 3A. Changes in Disenfranchise in Eurozone Periphery (1980 - May 2011)

Disenfranchise Total

Disenfranchi se Total 100 200 300 400 500 600 700 0% 2% 36% 94 288 618

Figure 3B. Changes in Disenfranchise in Non-Euro Nations (1980 - May 2011)

Disenfranchise Total

Sovereign Immunity Total 20 40 60 80 100 120 140 160 180 77% 73% 77% 60 172 178

Figure 4A. Changes in Sovereign Immunity in Eurozone Periphery (1980 - May 2011)

Sovereign Immunity Total

Sovereign Immunity Total 100 200 300 400 500 600 700 71% 78% 86% 94 288 618

Figure 4B. Changes in Sovereign Immunity in Non-Euro Nations (1980 - May 2011)

Sovereign Immunity Total

Euro Dollar Total 20 40 60 80 100 120 140 160 180 0% 10% 53% 28% 28% 38% 60 172 178

Figure 5A. Changes in Currency in Eurozone Periphery (1980 - May 2011)

Euro Dollar Total

Euro Dollar Total 100 200 300 400 500 600 700 0% 5% 23% 53% 54% 70% 94 288 618

Figure 5B. Changes in Currency in Non-Euro Nations (1980 - May 2011)

Euro Dollar Total

None 0.25 Individual Total 20 40 60 80 100 120 140 160 180 28% 14% 21% 0% 0% 28% 65% 82% 48% 60 172 178

Figure 6A. Changes in Acceleration in Eurozone Periphery (1980 - May 2011)

None 0.25 Individual Total

None 0.25 Individual Total 100 200 300 400 500 600 700 50% 32% 13% 0% 16% 52% 43% 40% 31% 94 288 618

Figure 6B. Changes in Acceleration in in Non-Euro Nations (1980 - May 2011)

None 0.25 Individual Total

New York English Local Total 20 40 60 80 100 120 140 160 180 23% 20% 25% 20% 32% 26% 2% 21% 42% 60 172 178

Figure 8A. Changes in Jurisdicion in Eurozone Periphery (1980 - May 2011)

New York English Local Total

New York English Total 100 200 300 400 500 600 700 32% 43% 46% 22% 26% 37% 94 288 618

Figure 8B. Changes in Jurisdicion in Non-Euro Nations (1980 - May 2011)

New York English Total

Under .40 .67 or .75 1 Total 20 40 60 80 100 120 140 160 180 37% 41% 20% 0% 0% 18% 63% 59% 62% 60 172 178

Figure 10A. Changes in Min Mod Vote in Eurozone Periphery (1980 - May 2011)

Under .40 .67 or .75 1 Total

Under .40 .67 or .75 1 Total 100 200 300 400 500 600 700 29% 38% 19% 2% 1% 41% 69% 61% 40% 94 288 618

Figure 10B. Changes in Min Mod Vote in Non-Euro Nations (1980 - May 2011)

Under .40 .67 or .75 1 Total

0-5 years 6-10 years 11 or more years Total 20 40 60 80 100 120 140 160 180 7% 43% 44% 62% 47% 23% 32% 11% 33% 60 167 173

Figure 11A. Changes in Maturity in Eurozone Periphery (1980 - May 2011)

0-5 years 6-10 years 11 or more years Total

0-5 years 6-10 years 11 or more years Total 100 200 300 400 500 600 3% 45% 29% 55% 44% 39% 41% 11% 32% 94 280 587

Figure 11B. Changes in Maturity in Non-Euro Nations (1980 - May 2011)

0-5 years 6-10 years 11 or more years Total