by On the FT Alphaville blog, Mark Weidemaier and Mitu Gulati argue that re-denomination risk in the Euro zone is most prominent in France and Italy. Bonds with CACs trade at higher prices. Most French and Italian [but not Greek] debt is governed by local law. … the governments could pass legislation redenominating their bonds from euros to francs or lira. … [But] some French and Italian bonds — bonds issued after January 1, 2013, with maturities over a year — have Collective Action Clauses (CACs). … Importantly, these CACs require a super-majority of investors (in principal amount) to approve any changes to the currency of the bond. … But it’s also possible a local law bond is no different than a local law bond with a CAC. After all, both are ultimately subject to the whims of the local legislature, and the courts may side with them. The markets seem to have a view, though: CAC bonds in the countries with heightened redenomination risk seem to be valued significantly more.
Topics:
Dirk Niepelt considers the following as important: Collective action clause, Euro, France, Italy, Notes, Redenomination, Sovereign Debt, Sovereign risk
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On the FT Alphaville blog, Mark Weidemaier and Mitu Gulati argue that re-denomination risk in the Euro zone is most prominent in France and Italy. Bonds with CACs trade at higher prices.
Most French and Italian [but not Greek] debt is governed by local law. … the governments could pass legislation redenominating their bonds from euros to francs or lira.
… [But] some French and Italian bonds — bonds issued after January 1, 2013, with maturities over a year — have Collective Action Clauses (CACs). … Importantly, these CACs require a super-majority of investors (in principal amount) to approve any changes to the currency of the bond.
… But it’s also possible a local law bond is no different than a local law bond with a CAC. After all, both are ultimately subject to the whims of the local legislature, and the courts may side with them.
The markets seem to have a view, though: CAC bonds in the countries with heightened redenomination risk seem to be valued significantly more.