CAC (Collective Action Clause)
A clause preventing minority bondholders from blocking debt restructuring agreed by the majority. Its evolution from the Korea 1998 bond through Argentina and Greece crises to today's sovereign bond standard.
The Tyranny of the Minority — A World Without CAC
When a country faces the inability to repay its debts, restructuring — cutting principal, extending maturities, reducing coupons — becomes unavoidable. This requires negotiating with bondholders.
The problem: bondholders number in the thousands. Even when the majority agrees to restructuring, "holdout" creditors who refuse can legally demand full repayment. During the Argentina and Ecuador crises of the 1990s–2000s, hedge funds bought bonds at deep discounts and sued for full repayment — the prototypical holdup.
CAC (Collective Action Clause) is the solution. If a specified percentage of bondholders (typically 75%+) agrees to restructuring, the remaining minority is legally bound by that decision.
From Korea 1998 to Greece — The Evolution of CAC
Korea's 1998 External Bond was one of the early global sovereign bonds to include CAC provisions. The Korean government adopted this clause to demonstrate rapid debt management capacity amid the IMF crisis.
When Mexico introduced CAC into New York law-governed sovereign bonds in 2003, it became standard for advanced-economy issuance. Then in 2012, during the Greek bailout, CAC was retroactively applied to bind over 95% of bondholders to restructuring — the largest CAC activation in history.
Today's eurozone bonds (post-ESM/EFSF) adopt a Single Limb CAC mechanism, enabling majority voting across the entire debt stock rather than individual bond series.
Key Terms
A creditor refusing to participate in restructuring and demanding full repayment. Without CAC, this constitutes a legal threat.
A structural vulnerability where per-tranche CAC allows holders of a specific series to form a blocking minority.
Where This Concept Appears
Learning Paths
Related Concepts
Reach for Yield
The behavioral pattern where investors take on higher risk to meet yield targets in a low-rate environment. The backdrop behind Korea 1998's T+345bp spread — and the seed of many crises.
Investment Grade
BBB- (S&P) / Baa3 (Moody's) and above. Because most institutional investors are mandated to hold only IG bonds, the IG/HY divide carries implications far beyond a simple ratings boundary.
Spread & Basis
How much higher a bond's yield is versus the risk-free benchmark. This spread encapsulates the market's credit and liquidity assessment of the issuer.