Disenfranchisement in Sovereign Bonds

Abstract

Long a part of sovereign bonds governed by English law, Collective Action Clauses, or CACs, became widespread in the early-2000s for bonds governed by American law. These clauses allow bondholders to change their bonds’ payment terms with something less than a unanimous vote, usually a supermajority. Amid the present European sovereign debt crisis, many view CACs as the most promising legal means of averting financial catastrophe. Too, a Model CAC is slated to be adopted by Eurozone sovereign-issuers beginning on January 1, 2013. This Note introduces a bond provision related to CACs that, to date, has received little scholarly attention: disenfranchisement, which is intended to safeguard the CAC process by barring a sovereign from lessening or even abrogating its obligations. This Note advocates disenfranchisement as an essential part of any forward-looking legal solution to sovereign defaults. Yet it argues that present disenfranchisement language uses an inapt corporate paradigm. The current language does not align fully with the historical justifications for CACs or the realities of the modern sovereign debt market. Mindful of CACs’ purposes and values, this Note uses the discussion to flag the strengths and weaknesses of the proposed Eurozone Model CAC for financial policymakers as well as the broader sovereign debt investment community.