Working Paper: CEPR ID: DP14575
Authors: Mitu Gulati; Ugo Panizza
Abstract: Unnoticed in the literature on sovereign bonds, an innovation has been taking place over the past decade and a half. Starting with a single issuance in 2006 by Mexico and two issuances by Brazil in 2007, a small number of issuers have been using what are known as “doomsday” or “make whole” call provisions. These are call options set deep out of the money at issuance, and therefore unlikely to ever be triggered. We report the birth and evolution of the clause over the past fifteen years and ask what drove its application to sovereign bonds. We also estimate its cost for the issuing country. It turns out, at least thus far, that it is free.
Keywords: makewhole call; doomsday call; sovereign bonds
JEL Codes: F34; H63; K12; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of makewhole provisions in sovereign bonds (F34) | evolution of sovereign bond market (G15) |
| makewhole provisions (G33) | costs for issuers (G24) |
| makewhole provisions (G33) | bond yields (G12) |
| makewhole clauses (G33) | pricing effects (D49) |
| presence of makewhole clauses (G33) | lower yields for certain countries (O57) |