Pleased to share the news that my article on euro-area sovereign bonds, “Boilerplate Shock: Sovereign Debt Contracts as Incubators of Systemic Risk,” will be published in the Tulane Law Review. Thanks very much to those of you who have provided feedback thus far (I welcome more of it, by email or in the comments). Here’s the abstract:
Scholars generally assess the usefulness of standard-form commercial contracts from the standpoint of the firms that use them. But these firm-centric accounts overlook the cumulative impact of standardization on a given market. Where the market in question is critical to the financial system, this oversight can be quite dangerous.
This article examines the coordinated use of two standard contract terms in European sovereign bonds, a market that many observers considered the greatest source of global economic instability in the five years following the 2007-09 financial crisis. These terms require that the bonds be paid in euro and that any dispute be resolved under foreign law. According to the existing scholarly consensus, these terms are benign, but a closer look reveals this view to be dangerously inaccurate. This conclusion has powerful implications not only for the multitrillion-dollar sovereign lending market, but for the future of securities contracts and financial regulation more generally.
Specifically, tenuous assumptions about the boilerplate terms that govern these debts reveal a perilous gap in financial regulation: when standard terms in private contracts become ubiquitous, they have the potential to inflict severe and unexpected harm on the broader financial system. Currently, the law lacks even a vocabulary to describe this dangerous externality, let alone a mechanism to manage it. By proposing a new rule that would address the problem of what might be called “boilerplate shock” in the Eurozone, the article argues for expanding the focus of financial regulation to encompass the potential of private contracts to become incubators of systemic risk.
Keywords: sovereign debt, financial regulation, systemic risk, securities regulation, monetary law, commercial law, contract design, boilerplate, bond, conflict of laws, eurozone, private international law, sovereign default, euro, european union, emu, lex monetae, isda, derivative, law of money, currency
JEL Classification: K00, K22, K23, K33, K41, E42, E44, E52, E58, E62, F02, F33, F34, F42.