Noah denkt™  -
    Project for Philosophical Evaluations of the Economy
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Collective-Action Clauses and Crony Capitalism
Dialog with the Alter Ego on new government bond rules, first drafted on Jan. 8, published on Jan. 9, 2013
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    “It used to be so simple. Developed-country government bonds were risk-free, while corporate bonds carried credit
    risk to varying degrees. The euro-zone crisis has exposed that assumption to be false. Not only do some government
    bonds contain credit risk. But the Greek debt restructuring is showing that in some ways, corporate-bond investors
    have more clout—and are less exposed to arbitrary actions—than their government peers. Greece is hoping
    bondholders will write off over €100 billion ($132.4 billion) of debt in a voluntary bond swap. But in an attempt to
    ensure the swap is completed, it is also introducing collective-action clauses in its bonds. That will mean that if
    enough bondholders sign up, even those that don’t will be swept up in the swap (…)
    No company can change the terms of its bonds retroactively, as Greece is able to do since over 90% of its debt is
    governed by Greek law. Any corporate borrower that tried to treat one of its existing bondholders more generously
    than others would get short shrift. Further, creditors have no recourse to sovereign assets in Greece, whereas in a
    corporate-debt restructuring, there are underlying assets—factories, stock, equipment—that ultimately can be seized
    and valued. If corporate bondholders convert their debt into equity as part of a restructuring, they then have the power
    that equity ownership confers: They could demand new management. Greek bondholders can’t demand a new
    Greek government. There is no such thing as sovereign equity. That makes corporate bonds look safer in some
    situations than government debt.”   Richard Barley, Bond Myths are exposed by Greece, in: Wall Street Journal, Feb.
    23, 2012


Question by Alter Ego of Noah denkt™ (AE): As of January this year all new government bonds that are issued in
the Euro zone will include a Collective Action Clause (CAC) which stipulates that a 75% majority of bondholders
can agree to a debt restructuring that is legally binding on all holders of the bond, including those who are
against the restructuring. The introduction of this clause aims at avoiding a never ending slew of litigations cost
that are usually brought about by those bond holders who do not agree with the write-off that a debt restructuring
signifies for them. What does Noah denkt™ make of the mandatory introduction of these clauses in Euro-zone
government bonds?
Answer by Noah denkt™ (Nd): Well, we certainly feel that there hasn’t been enough publicity around the
mandatory introduction of these clauses into the new government bond contracts. Or to put it differently, the back-
door way in which this measure has been introduced smells a lot like
just another aspect of crony capitalism.

AE: Why do you say that?
Nd: Because it is obvious that this measure is primarily aimed at the sidelining and silencing of small bond
holders. After all, it is the private and boutique investor who has little or no voice in the context of a debt
restructuring. And so it doesn’t take superior insight to understand that the big boys are conspiring here to shut
the little guy out for good

AE: Well, it isn’t as if small bond holders couldn’t be part of the 75% majority, is it? So, is it really fair to talk about
a silencing and sidelining of boutique investors here?
Nd: You have to understand that this 75% majority isn’t built on the idea of a one-man-one-vote system. It is
based on the number of subject bonds that the individual bond holder has. In other words, it is only natural that
the big bondholders would negotiate with each other first in order to reach the relevant. Small bond holders
definitely wouldn’t be part of that process.

AE: But what is unfair about the fact that those who carry the biggest risk talk to each other first?
Nd: Well, to the small investor the risk he carries by being a holder of subject government bonds may well be an
existential one. The big boys, however, will always have the option to claim a too big to fail status when entering a
phase of serious distress.       

AE: Still, the larger economy suffers a lot more if a big boy goes under than if a small investor has to tale a write-
off.
Nd: Look,
the larger economy suffers primarily if entrepreneurial initiative is more and more replaced by corporate
posturing. We, hence, do not necessarily agree with your conclusion.

AE: So can we take it then that Noah denkt™ is altogether against the mandatory introduction of these clauses in
government bonds?
Nd: No, we are against the fact that this is being done in a hush-hush manner. Investors need to have a clear and
honest understanding of what it is that they are getting into when buying these supposedly risk-free government
bonds. And
putting this CAC clause into the small print of newly issued government bond violates the idea of fair
and transparent market place.

AE: Is this then a case of Crony Capitalism?
Nd: Unfortunately, it is.
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Keywords:


Collective Action Clauses, Crony Capitalism, corporate capitalism vs entrepreneurial
capitalism, government bonds, restructuring government debt, government debt
restructuring, litigation costs of government debt restructuring, crony capitalism in the
Eurozone