Abstract

http://ssrn.com/abstract=1713914
 
 

Citations (2)



 


 



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


Stephen J. Choi


New York University School of Law

G. Mitu Gulati


Duke University - School of Law

Eric A. Posner


University of Chicago - Law School

February 1, 2011

University of Chicago Law & Economics, Olin Working Paper No. 541

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.

Number of Pages in PDF File: 35

working papers series


Download This Paper

Date posted: November 24, 2010 ; Last revised: March 18, 2011

Suggested Citation

Choi, Stephen J. and Gulati, G. 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: http://ssrn.com/abstract=1713914 or http://dx.doi.org/10.2139/ssrn.1713914

Contact Information

Stephen J. Choi
New York University School of Law ( email )
40 Washington Square South
New York, NY 10012-1099
United States
Gaurang Mitu Gulati
Duke University - School of Law ( email )
Box 90360
Duke School of Law
Durham, NC 27708
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/
Feedback to SSRN


Paper statistics
Abstract Views: 4,207
Downloads: 913
Download Rank: 12,834
Citations:  2

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.219 seconds