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The authors would like to thank Steven Dunaway and Robert Rennhack for very helpful comments. The views expressed in the paper and any remaining errors are the authors’.
Balance of Payments, Office of Business Economics U.S. Department of Commerce (1963). During 1921-28, gross purchases of foreign securities were $6.3 billion (3/4 percent of GDP).
The returns on Latin American bonds are those reported by Jorgensen and Sachs (1989) based on five selected countries.
In general, legal action against defaulting debtor countries had to be taken in the debtor country, which had the option of determining whether it would allow itself to be sued. Even when the debtor country could be sued in its own courts by consent, legal recourse could prove ineffective because the bond issue was generally created by legislation (an act of sovereignty) and could be suspended, modified, or repudiated by a similar method, which would be binding on the national courts (Borchard 1983).
Borchard (1983), cites a mid 1930’s agreement between Great Britain and Greece, that contains such clauses.
In the early stages of the debt crisis of the 1980s, commercial bank reschedulings of syndicated loans followed a similar pattern.
The U.S. Government sometimes intervened directly in the negotiations, although not always successfully. According to Borchard (1983), in 1941 and 1942 the State Department approved a Colombian and a Dominican Republic proposal, but the FBPC disapproved the plans because they were judged not to be fair enough to bondholders.
According to the FBPC Report, some bondholders that accepted Chile’s 1935 unilateral plan received interest payments of 1-1 1/2 percent of face value over several years. However, in 1940, the Chilean Government began to divert to other uses a large part of the funds that should have been used for amortization under the unilateral offer to bondholders. Under the final offer made by Chile and agreed with the FBPC in 1948, those bondholders who had not agreed to the 1935 plan were to receive in payment of back interest the amounts that had been paid to participating bondholders under the plan. In addition, those who had assented late to the Government’s unilateral offer--and under the terms of the offer had not been entitled to payments made before the year of acceptance--were to receive payments made in earlier years.
The agreement reached by Peru in 1943 included provisions to stretch debt maturity from 1958-60 to 1997, whereas the maturities of Brazil’s debt were stretched out by 40 to 60 years.
As an example, in 1903 the external and internal debt of Venezuela was converted into a unified issue.
Interest payments were sometimes reduced on the grounds that interest rate levels had fallen significantly since the time of issue of the original bonds, although such settlements often provided for a gradual increase over time. The interest reduction agreements of Brazil In 1934 and the Province of Buenos Aires in 1935 provided for a rising interest rate schedule. Brazil’s settlement in 1943 also included a provision in one of its two plans for principal reduction.
Chile’s settlement of 1948 included payment of about 12 percent of its unpaid interest since default, Peru’s 1943 agreement included a 10 percent payment, and Brazil’s 1943 agreement only a small portion.
World War II and its immediate aftermath contributed in part to this lengthy delay in regaining market access.
To some extent, the pervasiveness of defaults in the 1930s is explained by the reluctance of bondholders to provide new money, and thus mitigate borrowing countries’ illiquidity as noted in Eichengreen (1991). In addition, creditor-country governments appear to have been unwilling to intervene. Some political nuances to this explanation are added by De Cecco (1984), who argues that the post-World War I recognition by the U.S. and Great Britain that German war reparations --required by the Peace Treaty--were unrealistic, and that Germany would be unable to honor them, opened the door for repudiation and default on foreign obligations as a legitimate recourse for other debtor countries encountering financial difficulties in the 1930s.
This experience is often cited as supporting the current market view that bonds are seen as being senior to other, forms of indebtedness.