Editors’ Note

Abstract

Starting on 1 January 2013, the euro area authorities put in place a mandate that all sovereign bonds of member countries above a one-year maturity contain ‘collective action clauses’ or ‘CACs’.1 Basically, these CACs are a voting mechanism by which the bonds can be restructured with a supermajority vote of the bondholders (eg 66.67 per cent or 75 per cent). Prior to 1 January 2013, the vast majority of sovereign bonds issued by these same countries contained no such clauses. They basically said ‘nothing’ about how a restructuring would be conducted; they were blank. Today, in March 2019, therefore, almost every euro area sovereign has two sets of sovereign bonds outstanding: bonds with CACs (those issued after 1 January 2013) and bonds without CACs (those issued prior to 1 January 2013). (There were some temporary exemptions to the mandate for programmes already in place, but I will put that to the side for now.) The question that many in the market have asked for some years now, therefore, is which bonds are going to be safer in the event of a sovereign debt restructuring. And that question is particularly salient in the case of Italy, that recently slipped into recession, has an unpredictable government, and a gargantuan debt stock with a debt/GDP ratio of upwards of 130 per cent. Lorenzo Codogno, former chief economist at the Italian finance ministry, sees a crisis around the corner. To quote him (via the Guardian):