Working Paper: CEPR ID: DP75
Authors: Barry Eichengreen; Richard Portes
Abstract: This paper analyzes the 'debt crisis' of the 1930s to see what light this historical experience sheds on recent difficulties in international capital markets. We first consider patterns of overseas lending and borrowing in the 1920s and 1930s, comparing the performance of standard models of foreign borrowing in this period to the 1970s-80s. Next, we analyze the incidence and extent of default on sovereign debt, adapting models of debt capacity to the circumstances of the interwar years. We consider the choices available to investors in those foreign loans which lapsed into default in the 1930s, emphasizing the distinction between creditor banks and bondholders. Finally, we provide the first estimates of the realized rate of return on foreign loans floated between the wars, based on a sample of dollar and sterling bonds issued in the 1920s.
Keywords: debt; sovereign; borrowing; default; 1930s
JEL Codes: 441; 443; 040
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| debt from 1930-38 (H63) | GDP (E20) |
| higher levels of debt (H63) | degree of openness of the economy (F43) |
| higher levels of debt (H63) | size of the population (J11) |
| proportion of a country's debt in default (H63) | debt-GDP ratio (H63) |
| proportion of a country's debt in default (H63) | severity of the deterioration in terms of trade (F14) |
| proportion of a country's debt in default (H63) | increase in government budget deficit (H69) |
| economic conditions (E66) | incidence and extent of default (G33) |
| defaults (Y60) | realized rates of return on foreign loans (F34) |