Pricing terms in sovereign debt contracts : a Greek case study with implications for the European Crisis Resolution Mechanism /

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Bibliographic Details
Author / Creator:Choi, Stephen Jung, 1966- author.
Imprint:[Chicago, Illinois] : Law School, University of Chicago, 2010.
Description:1 online resource (38 pages) : charts.
Language:English
Series:John M. Olin Law & Economics Working Paper ; no. 541 (2d series)
John M. Olin Program in Law & Economics working paper ; 2nd ser., no. 541.
Subject:
Format: E-Resource Book
URL for this record:http://pi.lib.uchicago.edu/1001/cat/bib/8954630
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Other authors / contributors:Gulati, Mitu, author.
Posner, Eric A., author.
Notes:"November 2010."
Includes bibliographical references.
Title from online title page (viewed January 14, 2013).
Summary:"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."