Coase-Sandor Working Paper Series in Law and Economics

Publication Date

2010

Publication Title

Law & Economics Working Papers

Abstract

Conventional wisdom holds the 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 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

541

Included in

Law Commons

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