Collective action clause
A clause in a sovereign bond that lets a qualified majority of holders impose restructuring terms on all the others.
Without a collective action clause, changing a bond's payment terms requires the consent of every holder. A country restructuring its debt then runs into holdout creditors, who refuse the exchange and later sue for the full amount of their claim. The clause solves this coordination problem: if a qualified majority, often 75 percent of principal, accepts the new terms, they bind everyone. Recent versions aggregate the vote across several issues, which keeps a fund from buying a blocking minority in a single series. For investors and sovereign risk insurers, the clause changes the nature of default: an orderly restructuring becomes possible, but it also becomes binding on those who voted against it.
In February 2012, Greece passed a law inserting retroactive collective action clauses into its Greek-law bonds, then activated them in March to bind minority holders. The exchange covered about 200 billion euros of privately held debt with a 53.5 percent face value haircut. Since January 1, 2013, every new euro area sovereign bond with a maturity over one year must include such a clause.
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