Working Paper: CEPR ID: DP14071
Authors: Kim Oosterlinck; Loredana Urecherangau; Jacques-Marie Vaslin
Abstract: According to North and Weingast (1989), institutions that protect bondholders’ rights lower borrowing costs for the state and are therefore beneficial to both the state and the bondholders. In this paper we argue that such institutions may be so strong that bondholders can exploit them for their own benefit, not the state’s. To prove this point, we focus on the (non-)conversion of French bonds during the second quarter of the 19th century. At the time, France was able to convert its bonds. In other words, the state could ask bondholders to choose between redemption at par or a new bond with a lower coupon. Even though improvements in French credit meant the state could benefit from converting its debt as early as May 1825, no conversion took place before March 1852. Had it occurred at the first date, the French state would have saved the equivalent of 2.7 years of debt service. Our analysis shows that the institutions prevailing at the time gave large bondholders the power to veto any conversion.
Keywords: institutions; sovereign debts; france; conversions
JEL Codes: N23; N43; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strong institutions (D02) | bondholder power (G32) |
| bondholder power (G32) | failure of conversion (F31) |
| failure of conversion (F31) | negative impact on state finances (H79) |
| strong institutions (D02) | failure of conversion (F31) |
| bondholder power (G32) | negative impact on state finances (H79) |