Collective Action Clauses and Government’s Fiscal Incentives

JOSÉ WYNNE; FEDERICO WEINSCHELBAUM

Mendoza

Conferencia; XXXVIII Reunión Anual de la Asociación Argentina de Economía Política; 2003

Asociación Argentina de Economía Política

This paper studies how collective action clauses determine governments’ fiscal incentives, the price at which they are able to issue bonds in international capital markets, and the probability of these countries defaulting on its own debt. We show that when the probability of defaulting is mainly affected by governments’ fiscal conduct forcing all contracts to include collective action clauses to facilitate re-negotiation -as proposed by the IMF in the World Financial Architecture- is generally suboptimal. We also analyze the role of the IMF in affecting fiscal incentives and show that its presence can have ambiguous implication for countries’ welfare, bond prices and default  robabilities.