Quis Custodiet Quem? Sovereign Debt and Bondholders' Protection Before 1914

Abstract

The half-century before World War I has been characterized as the first age of financial globalization. This paper focuses on the role and significance of the bondholders' organizations for the governance of this market. I argue that the outcome of these institutions depended on two dimensions: the institutional variation that characterized these organizations and their strategic interaction. These aspects are addressed using a model of sovereign debt with constant renegotiation. An original data set with information on the settlement of defaulted debts in the period 1870-1913 is used to test the implications of the model. Empirical results support the premise that the quality of bondholders' representation matters for the terms of settlement and the costs of renegotiation. Renegotiation-friendly but not debtor-friendly organizations yielded the best ex post results for their members. The representation of bondholders' interests by the issue banks, on the other hand, produced inferior outcomes.

Keywords: Sovereign defaults, Bondholders' organizations, Pre-1913

JEL Classification: F34, G15, N10, N20