Pricing terms in sovereign debt contracts: a Greek case study with implications for the European crisis resolution mechanism

Abstract

An open question that sits at the intersection of law and finance is the extent to which provisions in standardized financial contracts, such as bond covenants, are priced. Financial economists believe that contract terms, and particularly those that reduce agency costs, are valued by the markets. Lawyers, including experienced practitioners, tend to believe that the market does not price individual contract provisions; and especially not those that are boilerplate. These assumptions about pricing accuracy have come to the fore in the public debate over the current financial crisis, with many, including prominent economists, complaining that models built on unrealistic assumptions about the abilities of markets to price risks were a major factor leading to the crisis. One significant part of the current global crisis is the Eurozone debt debacle, which began Key points