Abstract
Most of the literature on sovereign debt focuses on the supply side of the market—the banks that underwrite loans and the final creditors that hold bonds—and assumed that governments were passive when negotiating borrowing conditions. This chapter addresses the role of governments as independent decision-makers. Governments decided whether to grant exclusivity to a single patron bank or to negotiate with competing banks to reduce borrowing costs. Both options entailed positive and negative payoffs. Patron banks could raise the governments’ reputation and create business connections. Exclusivity also increased the chances that banks would grant cheap rescue loan in times of crisis to prevent their clients from defaulting. By agreeing on exclusivity, however, governments would not bargain for better deals with other underwriters. The outcomes of lending negotiations depended on the relative power of governments and banks. Both players were strong when they counted with good reputation among the public. Yet premier banks became weak when they were exposed to governments that faced debt crises, for these troubled clients could threaten to default to pressure for the issuing of rescue loans.
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- 1.
This chapter will provide a detailed literature review.
- 2.
According to Mauro et al. (2006, 11–19), by 1905 the stock of sovereign bonds negotiated in London totalled £4.1 billion, almost twice the size of Britain’s GDP.
- 3.
Grossman and Van Huyck (1988, 2) assert that “sovereign debt (…) is above the law.” The decision of a New York court on the Argentinean defaulted debt in the early 2010s is either an exception or the beginning of a groundbreaking trend.
- 4.
See also Eichengreen and Hausmann (1999).
- 5.
See Chapter 1 and Data Appendix for the definition of country risk.
- 6.
The Greek haircuts of the early 2010s were part of a rescue package rather than a default, for the creditors accepted to reduce the principal of the debt.
- 7.
See Roch and Uhlig (2016) for recent work on the role of the IMF.
- 8.
In a historically distant although related case, Drelichman and Voth (2011) show that Genovese bankers provided credit to the Spanish Empire under Philip II when the sovereign lacked funds to honour the debt.
- 9.
See Vizcarra (2009) for the case of Peru .
- 10.
RA XI/65/000/401.
- 11.
RA contains piles of letters from British investors and contractors interested in Brazil, who asked the bankers for information and intermediation.
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Weller, L. (2018). Governments versus Bankers in the Pre-1914 Sovereign Debt Market. In: Sovereign Debt Crises and Negotiations in Brazil and Mexico, 1888-1914. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-73633-4_2
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