THE SIMPLE CASE FOR COLLECTIVE ACTION CLAUSES

Abstract

In this paper we present a model that illustrates in a simple way the benefits of including Collective Action Clauses in sovereign debt contracts. We first show that a situation can arise in which debt forgiveness is Pareto-improving but, due to the existence of multiple creditors, this relief is not granted. We then show that the inclusion of Collective Action Clauses allows the Pareto-improving debt reduction to take place.