A collective action clause (CAC) allows a

supermajority A supermajority, supra-majority, qualified majority, or special majority is a requirement for a proposal to gain a specified level of support which is greater than the threshold of more than one-half used for a simple majority. Supermajority ru ...

bondholders In finance, a bond is a type of security under which the issuer (debtor) owes the holder (creditor) a debt, and is obliged – depending on the terms – to repay the principal (i.e. amount borrowed) of the bond at the maturity date as well as i ...

to agree to a

debt restructuring Debt restructuring is a process that allows a private or public company or a sovereign entity facing cash flow problems and financial distress to reduce and renegotiate its delinquent debts to improve or restore liquidity so that it can continue ...

that is legally binding on all holders of the bond, including those who vote against the restructuring. Bondholders generally opposed such clauses in the 1980s and 1990s, fearing that it gave debtors too much power. However, following

Argentina Argentina (), officially the Argentine Republic ( es, link=no, República Argentina), is a country in the southern half of South America. Argentina covers an area of , making it the second-largest country in South America after Brazil, th ...

's December 2001 default on its debts in which its bonds lost 70% of their value, CACs have become much more common, as they are now seen as potentially warding off more drastic action, but enabling easier coordination of bondholders. During the financial crisis of 2011–12, the Greek government imposed, with the support of the IMF and ECB, a retroactive CAC with a threshold of 75%.WSJ.com: "2nd UPDATE: Greece To Introduce Retroactive Collective Action Clauses-Source" 9 Jan 2012
/ref> That impacted 90% of the bonds, which issued under the jurisdiction of Greek courts. On 9 May 2012, the required supermajority was obtained, with 85.8% of domestic-law bonds tendered in favour.
/ref> An investor named Bill Gross said, "The sanctity of their contracts is certainly lessened. Bondholders have that to look forward to going into the future," but the French Minister of Finance celebrated the deal. In the exchange, investors will receive new bonds with a face value of 31.5 percent of the old ones, together with notes from the

EFSF The European Financial Stability Facility (EFSF) is a special purpose vehicle financed by members of the eurozone to address the European sovereign-debt crisis. It was agreed by the Council of the European Union on 9 May 2010, with the objecti ...

. The new debt is governed by English law and comes with warrants that may provide extra income in years if Greek economic growth exceeds thresholds. In accordance with the treaty establishing the

European Stability Mechanism The European Stability Mechanism (ESM) is an intergovernmental organization located in Luxembourg City, which operates under public international law for all eurozone member states having ratified a special ESM intergovernmental treaty. It was ...

, all bonds issued by

Eurozone The euro area, commonly called eurozone (EZ), is a currency union of 19 member states of the European Union (EU) that have adopted the euro (€) as their primary currency and sole legal tender, and have thus fully implemented EMU policies ...

member states with maturities exceeding one year, issued after January 1, 2013, have a mandatory collective action clause. Collective Action Clauses in Euro area

References

External links

* Haldane, Andrew G, Penalver, Adrian, Saporta, Victoria, Shin, Hyun Song (2005)
"Optimal collective action clause thresholds"
''Bank of England Quarterly Bulletin'', Spring 2005 * Martin Gunkel Oktober 2006, ''Bewältigung von Staatsinsolvenz durch collective action clauses?, Diplomica GmbH, Hamburg, , Zugl.: Berlin, Techn. Univ., Diplomarbeit, 2006. (It is a summary about the discussion of cac as instrument to solving state insolvency and include a rich literature review) Commercial bonds {{law-term-stub