Public symbol in private contract : a case study

Abstract

This article revisits a recent shift in standard form sovereign bond contracts to promote collective action among creditors. Major press outlets welcomed the shift as a milestone in fighting financial crises that threatened the global economy. Officials and academics said it was a triumph of market forces. We turned to it for insights on contract change and crisis management. Our research suggests that the incident might have broader implications. The contracting parties and others involved in the shift apparently used private contract terms to send public signals in ways that are rarely discussed in contracts literature. This article is based on our work in the sovereign debt community, including over eighty interviews with investors, lawyers, economists and government officials. Despite widespread public enthusiasm for contract reform, in private, few participants described the substantive change as an effective response to financial crises; many said it was simply unimportant. Most explained their own participation in the shift as a mix of symbolic gesture and political maneuver, designed to achieve goals apart from solving the technical problems for which the new contract terms offered a fix.

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