Pricing Terms in Sovereign Debt Contracts: A Greek Case Study with Implications for the European Crisis Resolution Mechanism

35 Pages Posted: 24 Nov 2010 Last revised: 25 Dec 2014

See all articles by Stephen J. Choi

Stephen J. Choi

New York University School of Law

Mitu Gulati

University of Virginia School of Law

Eric A. Posner

University of Chicago - Law School

Date Written: February 1, 2011

Abstract

Conventional wisdom holds that boilerplate contract terms are ignored by parties, and thus are not priced into contracts. We test this view by comparing Greek sovereign bonds that have Greek choice-of-law terms and Greek sovereign bonds that have English choice-of-law terms. Because Greece can change the terms of Greek-law bonds unilaterally by changing Greek Law, and cannot change the terms of English-law bonds, Greek-law bonds should be riskier, with higher yields and lower prices. The spread between the two types of bonds should increase when the probability of Greek default increases. Recent events allow us to test this hypothesis, and the data are consistent with it. We suggest that sovereigns, like private entities, minimize their cost of credit by offering investors with different risk preferences bonds with different levels of risk, which is reflected in their terms, including choice-of-law clauses. The market understands this practice. This finding has implications for the design of the European Crisis Resolution Mechanism (ECRM), which is currently being debated. To the extent the goal of the new restructuring mechanism is to force private investors to take better precautions, ex ante, the restructuring authorities would be well advised to abandon the past practice of largely ignoring variations in the boilerplate of sovereign debt contracts and giving equal treatment to different types of debt.

Suggested Citation

Choi, Stephen J. and Gulati, Mitu and Posner, Eric A., Pricing Terms in Sovereign Debt Contracts: A Greek Case Study with Implications for the European Crisis Resolution Mechanism (February 1, 2011). University of Chicago Law & Economics, Olin Working Paper No. 541, Available at SSRN: https://ssrn.com/abstract=1713914 or http://dx.doi.org/10.2139/ssrn.1713914

Stephen J. Choi

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Mitu Gulati

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

Eric A. Posner (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-0425 (Phone)
773-702-0730 (Fax)

HOME PAGE: http://www.law.uchicago.edu/faculty/posner-e/

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