FXstreet.com (Barcelona) - The Nomura Economics team have noted an article in today's FT which reports on a revolution is on the cusp of unfolding in Europe's sovereign bond market next year when Eurozone countries will begin including contentious new collective action clauses (CACs) in their bonds that would compel 'holdout' investors to take part in debt restructuring deals.

The clause aims to prevent recalcitrant creditors from undermining restructuring deals. The Nomura team point out that so far, CACs have been rarely used in developed markets. European Finance Ministers resolved in November 2010 that all countries in the currency bloc from next year incorporate CACs in all their new domestic bonds.

They write that the FT reports that, "there is a bond-by-bond threshold of 50%. So, if a majority of bondholders vote against a restructuring, they can shield that specific bond from the workout." However, doing so is tough, as most countries can rely on more pliant local holders to vote in favour. Lawyers therefore say that the aggregation clause in the euro-CACs will make them a very potent tool for indebted governments in distress.

Incorporating the new clauses into the Eurozone government bond market will be a slow process, because of the size of the outstanding non-CAC market. Moreover, state treasuries will still be able to fund 45% of next year's borrowing by adding to pre-existing, non-CAC bonds. The percentage of allowed taps falls to 5% of total borrowings in 2023 and beyond.

Related Articles
  1. Forex Education

    Four Currencies Under the Spotlight in 2016

    With currencies having become the “tail that wags the dog,” in terms of their impact on the global economy, these four currencies will be under the spotlight in 2016.
  2. Forex Fundamentals

    These Currencies Are The Biggest Losers Of The Stock Downturn

    Here’s a list of the hardest-hit currencies amid the global stock market mayhem.
  3. Forex Strategies

    Will the Euro Continue to Rally? (EUO)

    The euro is rallying. Should investors chase this performance or is the real opportunity on the other side of the trade?
  4. Investing News

    China’s Forex Reserves Dropped Significantly

    China’s forex​ reserves dropped by a record $93.9 billion at the end of August to $3.56 trillion because the Central Bank has been selling dollars to provide a cushion to the falling yuan​
  5. Forex

    The Pros and Cons of a Fully Convertible Rupee

    Amid the rising economic power of India, the talks of making the Indian currency fully convertible are gaining momentum. We look at the pros and cons.
  6. Forex Fundamentals

    Chinese Yuan an Unlikely Reserve Currency

    As the world's second largest economy, China's challenge to America’s dominance includes a push to make the yuan (RMB), the world’s reserve currency. Whether it can do that now is unclear.
  7. Economics

    How Currency Enforcement Helped Sink The Trans-Pacific Partnership (TTP)

    One particular barrier to trade that has received much attention of late and caused delays in negotiations of the TPP is exchange-rate manipulation, by which a country artificially devalues its ...
  8. Forex

    Top U.S Forex News Sites

    Breaking news moves forex markets. Here are the top U.S. sites for tracking forex news.
  9. Investing

    Financial News Comparison: Bloomberg Vs. Reuters (BAC, GOOG)

    Access to financial information has grown with the expansion of digital news. Bloomberg and Thomson Reuters lead the pack, claiming a majority of the business information market.
  10. Economics

    Who Benefits From South Korea's Lowered Interest Rates?

    South Korea is the latest country to cut interest rates in an attempt to stimulate economic growth.
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center