Working Paper: CEPR ID: DP7915
Authors: Marc Flandreau; Juan Flores
Abstract: This paper offers a theory of conditionality lending in 19th-century international capital markets. We argue that ownership of reputation signals by prestigious banks rendered them able and willing to monitor government borrowing. Monitoring was a source of rent, and it led bankers to support countries facing liquidity crises in a manner similar to modern descriptions of ?relationship? lending to corporate clients by ?parent? banks. Prestigious bankers? ability to implement conditionality loans and monitor countries? financial policies also enabled them to deal with solvency. We find that, compared with prestigious bankers, bondholders? committees had neither the tools nor the prestige required for effectively dealing with defaulters. Hence such committees were far less important than previous research has claimed.
Keywords: bondholder committees; conditionality; debt crises; prestige; relationship banking
JEL Codes: F34; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| prestigious banks' ownership of reputation signals (G21) | effective monitoring of government borrowing (H63) |
| effective monitoring of government borrowing (H63) | conditionality lending (F34) |
| conditionality lending (F34) | assistance to countries in liquidity crises (F35) |
| prestigious banks' ownership of reputation signals (G21) | source of rent for bankers (G21) |
| prestigious banks (G21) | likelihood of repayment (G33) |
| prestigious banks (G21) | signaling of government credibility to investors (G38) |
| bondholder committees (G34) | lack of effective management of defaulters (G33) |