EmergingFinancialMarketsofthe1820s:LatinAmericanSovereignDebt,1825-1852

(Preliminaryversion;notforcitation)

GailD.TrinerDepartmentofHistoryRutgersUniversity

Presentedat

XVIIIWorldEconomicHistoryCongressPolityandStateFinanceinthePeripheriesoftheGlobalEconomy

AbstractAsacasestudyinthevicissitudesofemergingborrowersinglobalfinancialmarkets,thispaperanalyzesfluctuationswithinthefirstcycleofLatinAmericansovereigndebtissuedinLondon.DataderivedfromtheweeklypricesofthemajorsovereignborrowerswhohadnewlyborrowedintheLondonbondmarketcombinewithhistoricalnarrativetosuggestthatcircumstancesspecifictoeachborrowerdidnot,alone,explaineithersovereigndefaultorresolution.Creditors’perceptionofthedebtors’creditworthiness,takingaccountofarangeofinvestmentalternatives,carriedsignificantweightinunderstandingthedecisionstogointoandcomeoutofdefault.Theconclusionssuggestthatcircumstancesspecifictoeachborrowerdidnot,alone,explaineithersovereigndefaultorresolution.Creditors’perceptionofthedebtors’creditworthinesscarriedsignificantweightinunderstandingthedecisionstogointoandcomeoutofdefault.However,neitherdidsovereigndebtorsreactpassivelytomarketconditions;resolvingdefaultsreflecteddebtordecisionstoavailthemselvesofreceptivefinancialmarkets.Giventhegeneralinterpretationofacrisisin1825/26asthefirstmodernglobalsovereigndebtcrisis,thedearthofdetailedexplorationintothespecifictrajectoryofthecycleiscurious.Thepapercontributestoremedyingthatlacuna

EmergingFinancialMarketsofthe1820s:LatinAmericanSovereignDebt,1825-1852

(Preliminaryversion;notforcitation)

The1820swasadecadeofinterrelatedandgeographicallywidespreadshiftsinpolitical

arrangements,globalfinanceandbusinesspractices.Europeanstatesre-organizedthemselves

intheaftermathsoftheNapoleonicWarsandtheindependenceoftheirformercoloniesinthe

Americas.Theseshiftingpoliticaldynamicsbothcreatedandrespondedtoeconomicchange,

whichmanysawasnewopportunity.Amongthemostimportantinnovationswasanearly

periodoffinancialglobalization.Theexpansionoftheglobalfinancialmarket,centeredin

London,gavenewlyindependentLatinAmericannationsaccesstocapitalatthesametimethat

itofferedpotentialinvestorstheopportunitytoinvestanonymouslyinnewstatesand

enterprises.1Politicalindependenceamongtheformercolonies(theemergingmarketsoftheir

time)andindustrializationintheNorthAtlanticopenedthepossibilityofgreatertrade,

exchangingcommoditiesformanufacturedgoods.Economicpotentialpropelledbothproducers

(ofprimarycommoditiesandofmanufactures)andinvestorshopingtobenefitfromthegains.

Financialopennesssupportedearlycapitalinflowstonewstates,whichquicklyturnedinto

widespreadsovereigndefaults.

ThispaperanalyzesfluctuationswithinthefirstcycleofLatinAmericansovereigndebt

issuedinLondon(anddenominatedinpoundsterling)asanearlycasestudyinthevicissitudes

ofemergingborrowersinglobalfinancialmarkets.2Thecyclelastedfrom1822-1825,whenthe

1ThispaperstandsontheshouldersofCarlosMarichal,ACenturyofDebtCrisesinLatinAmerica:FromIndependencetotheGreatDepression,1820-1930(Princeton:PrincetonUniversityPress,1989);FrankG.Dawson,TheFirstLatinAmericanDebtCrisis:TheCityofLondonandthe1822-25LoanBubble(NewHaven:YaleUniversityPress,1990).ForanearlyclassicreadingonBritishinvestmentinLatinAmerica,seeLelandHamiltonJenks,TheMigrationofBritishCapitalto1875,BorzoiPoliticalScienceTexts(NewYork:A.A.Knopf,1927),Chapter2.2AsignificantboomincapitalizingLatinAmericanminingcompanieslistedontheLondonexchangeoccurredduringthesameyears.Almostallofthesehighlyspeculative(andoftenfraudulent)companiesfailedwithinafewyears.Theyarenotthesubjectofthispaper.

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loanswerecontracted,untilabout1852,whendefaultsandcomplianceproblemswerewellon

theirwaytoresolution.Giventhegeneralinterpretationofacrisisin1825/26asthefirst

modernglobalsovereigndebtcrisis,3thedearthofdetailedexplorationintothespecific

trajectoryofthecycleiscurious.Thepapercontributestoremedyingthatlacunabyassessing

thevalueofsovereignbonds,relativetoeachother,fromtheperiodleadinguptodefaultuntil

resolution.Theunderlyingquestionsoftheresearchare:towhatextentdidinvestors

distinguishbetweendifferentLatinAmericanborrowers,andhowandwhendidthevalueof

debtofemergingsovereignsrespondtoconditionsoutsideoftheircontrol?

Thisresearchcomplementsthethrivingrecentbodyofscholarshiponsovereigndebtof

thenewlyindependentLatinAmericanstates,whichlargelyfocusesonthedecisionsandactions

ofindividualborrowers.4Analternativeperspectivehasbeentofocusonthecreditorsideofthe

market,withlittledetaileddistinctionmadeamongdebtors.5Intermediariesatthecenterofthe

capitalmarketalsohaverecentlycomeunderscrutiny.6Thispaper’sunderlyingpremiseisthat

3Dawson;LarryNeal,"TheFinancialCrisisof1825andtheRestructuringoftheBritishFinancialSystem,"FederalReserveBankofSt.LouisReview80,no.3(1998).4Forsomeexamplesofrecentliterature,seeLeonardoWeller,"Rothschilds''DelicateandDifficultTask':Reputation,PoliticalInstabilityandtheBrazilianRescueLoansofthe1890s,"EnterpriseandSociety16,no.2(2015);WilliamRoderickSummerhill,IngloriousRevolution:PoliticalInstitutions,SovereignDebt,andFinancialUnderdevelopmentinImperialBrazil,ed.RutledgeIan,YaleSeriesinEconomicandFinancialHistory(NewHaven:YaleUniversityPress,2015);GracielaLKaminskyandPabloVega-García,"VarietiesofSovereignCrises:LatinAmerica1820-1931,"NBERWorkingPaperSeries(2014);CatalinaVizcarra,"Guano,CredibleCommitments,andSovereignDebtRepaymentinNineteenth-CenturyPeru,"JournalofEconomicHistory,no.2(2009);RichardJ.Salvucci,Politics,Markets,andMexico's"LondonDebt,"1823-1887,CambridgeLatinAmericanStudies(NewYork:CambridgeUniversityPress,2009).AclassicearlystudyisJ.FredRippy,"LatinAmericaandtheBritishInvestment"Boom"ofthe1820's,"TheJournalofModernHistory19,no.2(1947).5ThemostnotablecontributiontothisliteratureisCarmenM.ReinhartandKennethS.Rogoff,ThisTimeIsDifferent:EightCenturiesofFinancialFolly(Princeton:PrincetonUniversityPress,2009).6AninnovativeinterpretationoftheroleofdebtunderwritersisemergingfromtheworkofMarcFlandreau,JuanFloresandtheircollaborators.Foraselectionofthiswork,seeMarcFlandreauandJuanH.Flores,"BondsandBrands:FoundationsofSovereignDebtMarkets,1820–1830,"TheJournalofEconomicHistory69,no.3(2009);MarcFlandreau,"SovereignStates,BondholdersCommittees,andtheLondonStockExchangeintheNineteenthCentury(1827–68):NewFactsandOldFictions,"OxfordReviewofEconomicPolicy29,no.4(2013);MarcFlandreauetal.,"TheEndofGatekeeping:UnderwritersandtheQualityofSovereignBondMarkets,1815-2007,"inNberInternationalSeminaronMacroeconomics2009,

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understandingglobalsovereigndebtrequiresanalysisthatintegratesalloftheseplayers.The

short-termperspective,basedonweeklychangesofbondyields,acrossbondissuerswithina

well-definedtimeframeallowsanuancedcomparativeunderstandingofthedynamics

underpinninginternationalfinancialactivity.

Conditionswithintheanonymousmarketofbondbuyersandsellersgelledwith

nationalcircumstancesinthelate1820stoinfluencewidespreaddefaultamongLatinAmerican

sovereignborrowers.Nevertheless,theemergingborrowersremainedresponsivetothe

stressesofmarketfluctuationduringperiodsoffluctuation.Theglobalfinancialenvironment

wasnotconduciveforborrowerstodecidetosettletheirdebtsuntiltheendofthe1840s.The

paperinvokesBrazilasareferentforSpanishAmericansovereignloansandnuancesthenotion

ofdefault;Brazil’sincompletedefaultresultedinmitigated,butstillsignificantcosts.

Theconclusionssuggestthatcircumstancesspecifictoeachborrowerdidnot,alone,

explaineithersovereigndefaultorresolution.Creditors’perceptionofthedebtors’

creditworthiness,takingaccountofarangeofinvestmentalternatives,carriedsignificantweight

inunderstandingthedecisionstogointoandcomeoutofdefault.However,thepaperalsofinds

thatsovereigndebtorsdidnotreactpassivelytomarketconditions;resolvingdefaultsreflected

debtordecisions,whichwerecostlyandpoliticallyrisky,toavailthemselvesofreceptive

financialmarkets.Theseconclusionsarenotsurprising;infacttheyareexactlywhatfinancial

theoristsandhistorianswouldexpect.Theirimportanceistohighlighttheubiquitoustradeoff

foremergingeconomiesinglobalfinancialcapitalmarketsbetweenaccesstocapitaland

vulnerabilitytofluctuation.

Afterthisintroduction,thepaperproceedsinsectionsthatofferadiscussionofdata

andmethodology,briefhistoricaloverviewtoestablishthesetting,ananalysisofthedebt

ed.LucreziaReichlinandKennethD.West(Chicago:NationalBureauofEconomicResearch;UniversityofChicagoPress,2010).

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characteristicsacrossthecyclefromearlyborrowingthroughdefaultuntilresolutionofdebt

irregularities,followedbyadeepdiveintothechronologyofbondyieldfluctuationin

conjunctionwithhistoricalnarrative,andaconclusion.

DATAANDMETHODS

Financialandpoliticalhistoriansrecognizethelevelandfluctuationofbondpricesasan

importantmeansbywhichinterestedpartiesassessthecreditworthinessandstabilityofa

debtor.Fordebtors,investor/creditorsandanalyststhelevelandfluctuationofthevalueof

bondsofferthemetricstoproxythevalueofdebts,evenifthesemeasuresdonotaffectthe

long-termcostofcapitalattachedtotheoriginalloan.7Analyzingthetrajectoryofpricesat

whichbondholdersboughtandsoldsovereignbondsallowsforanassessmentofmarket

fluctuationsandforinsightontheunderstandingbypropertiedeconomicactorsofthe

prospectsforborrowingstates.Thevalueofinternationalsovereigndebt,afterithasbeen

issued,doesnotaffectaborrower’spaymentobligations.However,fluctuationsinvaluedirectly

influencethevalueofcapitalwithinthatsovereign’sterritory.Thepricetrendalsoindicatesthe

credibilityandlegitimacyofasovereignborrowerinmeetingitscommitmentstoitsforeignand

domesticcreditors,itscitizensandintheglobalgeopoliticalarena.Alloftheseissuesheldsway

intheearlynineteenthcentury,astheycontinuetodosotoday.

PricesforthebondsofnewsovereignborrowersandonBritishperpetualconsolidated3

percentbonds(knownasconsols)areofinteresthere.Asthedominantinstrumentinglobal

financialmarkets,theconsolyieldservesasthebenchmarkmeasureforthemarket–the

(closestapproximationofrisk-free)returnonmarketinvesting.Normalcomparativefinancial

analysisrequiresthetranslationofloanpricesintoyields-to-maturity,tonormalizeprice

7Sincethefacevalueofthebondisestablishedwhenitisissued,themechanismforincreasingitsreturnistopayalowerpriceforitonthesecondarymarket.Investorsrequirehigherreturns(lowerprices)onbondsasexpectationsofadebtor’sdecline.

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fluctuationsfordifferencesininterestrate,maturityandinitialprice.8However,theyield-to-

maturitymeasurecannotbeusedforloansindefault,theloansofinteresthere.Although

investorscontinuedtobuyandsellbondswhileindefault,itisunlikelythatmarketparticipants

assessedanexpectedyield-to-maturitywhenmakingpurchase/saledecisions.Inorderto

normalizetheloanswithrespecttointerestrateandissueprice,andtoreflectthe

indeterminatescheduleoftheirresolution,thepaperutilizesthecurrentyield,treatingthe

bondsasthoughtheywereconsols(fixeddividendrateandperpetualdividendpayments.)9

Inkeepingwithmuchofthecurrentliteratureonsovereigndebt,thepaperinvokesthe

conceptofariskpremiumtoisolatethetrajectoryofsovereigncreditworthiness.Therisk

premium,orcountryrisk,isthedifferencebetweenthebondyieldandthemarketbenchmark

(consol)yield.10Thistransformationassumesthatriskassessmentwasindependentofthe

benchmark.Findingsfromthispapersuggest,incontrast,thatsovereignriskassessmentsfor

emergingborrowersrespondedtothestateofthemarkets.Therelationshipmakessensefrom

ananalyticperspective,ifinvestorsadjustedtheirrequiredreturnonriskpartiallyinreflection

oftheirliquidityconcerns,givenothercircumstancesinthemarket.However,animplicationof

thisrelationshipisthattheriskpremiummeasuredoesnotfullydistinguishbetweensovereign

8Alternativemeasuresoftheex-anteorex-postinternalratesofreturnarenotsuitablehere.Theex-anterateassumesthattheinitialtermsofthebondsaremet,whichweknownottobethecase;theex-postmeasureassumesthatweknowthecostofresolution.Neithermeasurerevealstheexpectationsofinvestorswhilethebondswereoutstanding.9Thecurrentyieldissimplythecouponpayment/currentprice.Forpurposesofconsistencyallofthebondprices,includingthosenotindefault,havebeenconvertedtocurrentyields.Theyieldmovesinverselywithprices:ahigherpricetranslatesintoaloweryield,whichreflectsfavorablyontheborrower(andviceversa–lowerpriceequatestoahigher,lessfavorable,yield.)10Theriskpremiumthatinvestorsrequiredonsovereigndebt,comparedtothemostrisk-free(safest)alternativeuseofcapital,conveysinformationonthefinancialstandingofborrowersininternationalfinancialmarketsandseparatessovereignriskfromoverallrisksofthefinancialmarket,whicharenotspecifictotheborrower.Thismeasureisolatescountryriskfrombroadunderlyingshiftsofthefinancialmarkets.Thebestbenchmarkof“risk-free”lendingforthenineteenthcenturyistheyieldontheBritishconsol.ThespreadbetweentheyieldsonsovereignbondsofeachnationandtheBritishconsoldefinestheriskpremium.

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political/economicriskandmarketrisk.11Thisproblemisnotaddressedinmuchanalysisof

emergingmarketsovereigndebt;however,itplaysaroleinthemethodologicalchoicesofthis

paper.

Weeklybondpricesforthe“ForeignFunds”listedonTheCourseoftheExchange(the

reigningfinancialpressoftheday)comprisethequantitativedatabaseforderivingtherisk

premia.SomeofthefourteenborrowerslistedasForeignFunds(Table1)arenotincludedin

thisanalysis.AmongLatinAmericanborrowers,anattemptedloantoGuatemalaisexcluded;12

theinfamouslyfraudulentloantotheimaginarykingdomofPoyaisisalsonotconsidered.The

loantoGranColombiawasre-apportionedwithitspartitionintoNewGrenada,Venezuelaand

Ecuadorin1834.Redefinedpoliticalboundariesresolvedidnotdebtproblems,andNew

Grenada(Colombia)bondsweredelistedfromthepricetablesin1846,aftertradingirregularly.

EuropeansovereignborrowersalsoofferabriefmetricofcomparisonfortheLatinAmerican

states.ThedataidentifytwodistinctgroupsofEuropeanstatedebt:a“healthy”groupof

Austria,DenmarkandRussia,whomettheserviceobligationsonthedebtand“unhealthy”

borrowerswhodefaultedorfailedtoplacetheirbonds.13Forefficiencyofexposition,thispaper

11Anearlierversionofthispaperattemptedtoseparatetheeffectsofmarketchangefromchangingriskassessment.Severedataconstraintsanddifficultiesinsystematicallyidentifyingsustainedchangerenderedthisapproachinfeasible.JohnLandonLanejumpedthroughconsiderableeconometrichoopstotrytomakethiswork;evenintheabsencemethodologicalsuccess,theefforthelpedtodeveloptheideasofthepaper.12Guatemaladefaultedimmediately;thevastmajorityofthecontracteddebtremainedunsold,andtheydidnotestablishasignificanttradingrecord;thereforeithasbeendroppedfromtheanalysis.(In1838,theresidualoftheGuatemalaloanwasapportionedbetweenthesuccessorcountries(CentralAmerica,lessPanama,intwenty-firstcenturygeography);renegotiationoftheseloansbythesuccessorstateswasstaggeredfrom1844through1874.13The“unhealthy”Europeanborrowers,Greece,NaplesandSpain,arenotconsideredinthispaper.Afterdefault,GreekbondstradedveryseldomontheLondonexchange(thusgeneratinglittledata.)ThecurrentstateofthedatadonotallowmetoidentifycommonalitiesbetweenSpanishandSpanish-Americandebt,andthehistoricalanalysiswouldnotgenerateexpectationsofcommonalities.ThedesiretoavoidanysuggestionorpresumptionofsuchcommonalitieshaspromptedmetoexcludeSpain–and“unhealthy”Europefromthisanalysis.Alsoamongwhatwouldhaveconstituted“unhealthy”Europe,Naplesattemptedtoissuedebtin1824,buttheissuanceseemstohavebeenunsuccessful.Also,these

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usesthehealthyEuropeanborrowersofAustria,14DenmarkandRussiaincomparative

perspectivewiththeLatinAmericandebt.Inaddition,Portuguesebondyields,relativetothe

Brazilian,offeraninterestingmirrorintobothBrazilianindependenceandtheinter-related

connectionsofthebondmarket.Forsomeborrowers,debtrenegotiationsduringthiscycle

resultedintheactualexchangeofbonds,thepriceserieshavebeensplicedtoreflecttheseries

involvedinactivetradingatanygiventime.15(Figures1-4displaytheriskpremiaandyield

trends.SeetheDataAppendixforthedetailsofthebondseries’constructionandtheAppendix

Tablefordescriptivestatistics.)

Theanalyticalframeworkheredepartsfrommostcurrentanalysesbyeschewing

econometrictestingoftheriskpremiatrends,suchascalculatingbreak-pointsforeventstudies.

Thedecisiontorelyonhistoricalnarrativereflectsthefrequencyof,andinabilitytocontrol,

gapsindatapointsaswellasthecontinuedinterrelationshipbetweenriskpremiaandmarket

yieldidentifiedabove.16Manyofthebondstradedirregularly,andtheycontinuedtotrade(in

unknownvolumes)ontheLondonexchangeafterdefaults.Thepricesreportedfordefaulted

bondscouldreflectcurrentinformation(“news”)aboutthevalueofthedebt,sporadicadhoc

andpartialpaymentsofpast-dueamounts,speculativetradinginanticipationofdebt

settlementre-negotiations,churningtogiveanappearanceofactivemarkets,or“noise.”Prices

alsocouldchangeinresponsetochangesininvestors’liquidityorperceptionsofanygivenbond

relativetoothers.Further,priortotransatlantictelegraphcommunications,severeasymmetry

bondissuesdonotinclude(North)AmericanissuesorthoseofFrance,whichhadbeenissuedduringthereparationssettlementoftheNapoleonicWarsandTheCourseoftheExchangelistedseparately.14ThebondstradedatirregularintervalsandAustriarefinanceditsdebtdomestically,withdrawingfromtheLondonlistingin1849.15ForMexicothe1837and1846loansreplacedtheirpredecessors(thoughtheyalsofellintodefault),andthePeruvianloanwasre-negotiatedin1849.16Inanenvironmentofhighfluctuationandunknownvolumesoftransactions,theusualstrategiesofeitherassigningthelast-knownvaluetomissingdataorinterpolationbetweenknowndatapointsareunsatisfactory.Imposingarequirementofhavingdatapointsforallbondsinthesamplewouldreducethedatasettoomuch.

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inthetimingofresponsestocontinentalandinter-continentalnewsrenderstheinterpretation

inLondonofeffectsofpoliticalandeconomicnewsfromLatinAmericaimprecise.17

ThebondsofBrazil,MexicoandPerutradedwithrelativeregularity.Historicalnarrative

andlesscompletequantitativeobservationswithrespecttootherborrowerssupplement

informationfromthesebondseries.TheTimes(ofLondon)isthemajorsourcefordetermining

what,andwhen,theaverageinvestorlearnedofeventsinLatinAmerica.18

Finally,twenty-eightyearsisaverylongtimeinfinancialmarketsandthetrajectoryof

riskpremiaandyieldsinFigures1and2suggestscommonpatternsalongwithsignificant

differences,whichmeritdetailedchronologicalstudy.Justastheexperiencesofborrowers

varied,sodiddistinctsub-periodsofheightenedfluctuationdemonstratedifferencesinrisk

premiabehavioracrosstheentire28-yearsofthefirstsovereigndebtcycle.Financialhistory

andFigures1-4identifythreeperiods(betweenwidelyexperiencedlocalizedpeaksofrisk

premiaandconsolyield)whencommonalitiesintheriskpremiaandconsolyieldtrendssuggest

thepredominanceofgeneralmarketforcesovernationalcircumstancetoexplainvariation:

1825-June1830,1845-1848and1849-1852.Withinthesetimeperiods,thedatarevealthatthe

movementsofriskpremiaandtheconsolyieldweregenerallyinthesamedirection.Inthe

interim,fromJuly1830through1845LatinAmericanbondsdemonstratedmoredisparate

movement,whilehealthyEuropeansecuritiesgenerallyshowedslowimprovement(declining

riskpremia.)Further,localizedshort-termpeaksandtroughsofpremiaandtheconsolhada

17ThispaperdistinguishesbetweeneventsthathappenedinEurope,whichhadimmediateimpactonbondprices,andthoseoccurringinLatinAmerica.Forthelatter,theireffectonbondyieldinLondonisconsideredrelativetotheirannouncementinTheTimes.Thetimegapsoftransatlanticinformationflows,intheerabeforetransoceanictelegraphinthe1870sareanimportant,consideration.ItgenerallyrequiredeightweeksforcommunicationtoflowbetweenLondonandRiodeJaneiro,andsixweeksbetweenLondonandMexicoCity.(Steamtransportwasintroducedduringthe1850s.)Althoughthismethodneedstobeinterpretedloosely,itprovidesasurprisinglyaccuratemappingbetweenimportantnewseventsandbondyieldshocks.18TheTimeswasthenews-providingpublicationoftheday;othersourceswouldhavebeenmorelimitedininformationdissemination.

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tendencytoclusterwithinconsecutiveweeks,servingasausefultoolforidentifyingmarket

causalityincontrasttosovereignrisk.(Table2presentsthemeasuresoffluctuationofinterest

inthepaperandTable3identifiestheclusteringofweeklyfluctuations.)

Althoughcircumspectionisnecessaryininterpretingthedataseries,thishistoryofthe

bondyieldsrequiredofsovereignborrowersrevealsconsistentandnuancedinsightintothe

particularitiesofbothearlycapitalmarketactivitiesandearlyLatinAmericannationformation.

HISTORICALSETTING

Inthe1820s,theideathatsovereignstatescouldborrowsubstantialamounts,forlong

periodsoftime,fromanonymouslenders/investorsinaforeigncountryexpandedtonew

borrowers.19Existingscholarshipattributestheexpansionofthedebtmarketsduringthese

yearstotherapidandverylargeincreaseininvestorliquiditywiththeendin1815ofwartime

borrowingthathadfinancedBritain’sundertakingoftheNapoleonicWars.20Between1822and

1825,thefourteensovereignstateslistedinTheCourseoftheExchangeraised£40.1million.

TheseborrowersincludedsevennewlyindependentLatinAmericannations,theemerging

marketsoftheera,with£20.75millionofdebtobligations.Brazilianbondsaccountedfor£3.69

million(£5.69million,includingthePortugueseobligationsidentifiedbelow,forwhichthey

assumedresponsibilityasaconditionofPortugueserecognitionofindependence.)Theother

majorborrowerswereMexicoandPeru,with£6.4millionand£1.2millionofbonds,

19Althoughdomesticdebtandintra-Europeanmarketshadlongexistedforasmalluniverseofsovereigns,theexpansiontonewsovereignborrowersinthe1820swasanexpansionfromearlieryears.(ReinhartandRogoff.)20Neal;LarryNealandMarcWeidenmier,"CrisesintheGlobalEconomyfromTulipstoToday:ContagionandConsequences,"inNBERWorkingPaperNo.9147(CambridgeMA:NationalBureauofEconomicResearch,2002);Dawson.

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respectively(SeeTable1.)Many(biased)contemporaryobserversandsomesubsequent

financialhistorianshavesuggestedthatthesedebtswerenotexcessive.21

Thenewstatesincurredtheloansforpurposesofmilitaryexpenditureandfiscal

balancing.Someanalystshavecontrastedtheseloanswiththedevelopmentalpurposes

associatedwithsubsequentborrowingtofinancelarge-scalephysicalinfrastructure.22An

alternativeinterpretationcouldsuggestthatthesestate-buildingactions,intheabsenceof

havinginheritedviablepoliticalorfiscalsystemsfromimperialgovernors,wereamongthemost

importantdevelopmentalactivitiesfacingthenewlyindependentstates.Intheirera,forallof

thenewlyindependentstates,state-buildingincludedthewarfareinvolvedwithestablishing

legitimacyandterritory.Italsoincluded,fromtheperspectiveofdebtors,puttinginplace

financialresourcesthatbridgedfromindependencetotheestablishmentoflegitimacyand

constructionofarevenue-generatingfiscalsystem.Londonfinancialmarketshadpreviously

servedthesepurposes,albeitwithdifferentsovereigndebtors.

Brazilianbondsservedasanimportantreferentinthemarkets.Brazilwasaloneamong

theLatinAmericanborrowerstonotenterintocompletedefaultduringthisperiod.23In

comparisonwiththenewlyindependentSpanishAmericanrepublics,Brazilalsopossessedmany

21Contemporaryinvestorswouldhavebeenbiasedtowardsthisopinionbecauseitbothbolsteredtheirargumentsforpromptrepaymentanditdidnotreflectadverselyontheiroriginaljudgmenttoextendcredit.SeeforexampleTheTimes(London)15April1826and21January1836;RobertCrichtonWyllie,"ALettertoG.R.Robinson,Esq.,ChairmanoftheCommitteeofSpanishAmericanBondholders,onthePresentStateandProspectsoftheSpanishAmericanLoans.,"ed.CommitteeofSpanishAmericanBondholders(London:TheMakingoftheModernWorld.Web.19May2017.,1840).andSalvucci,91-92.22AlbertFishlow,"LessonsfromthePast:CapitalMarketsDuringtheNineteenthCenturyandtheInterwarPeriod,"InternationalOrganizations39,no.3(1985);W.M.Mathew,"TheFirstAnglo-PeruvianDebtandItsSettlement,1822-49,"JournalofLatinAmericanStudies2,no.1(1970):83;Summerhill.Analternativeperspectiveon“developmental”borrowingofthenineteenthcentury’sthirdquarterisavailableinMarcFlandreau,AnthropologistsintheStockExchange:AFinancialHistoryofVictorianScience(Chicago:TheUniversityofChicagoPress,2016).23SomeofthenotableliteratureonBraziliansovereigndebt,inadditiontoSummerhill’srecentcontribution,includes:MarcelodePaivaAbreu,"BrazilasaDebtor,1824–1931,"TheEconomicHistoryReview59,no.4(2006);ValentimF.Bouças,HistóriaDaDívidaExterna(RiodeJaneiro:EdiçõesFinanceiras,1950).

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characteristicsthatinvestorswouldfavor.Thetransitiontoindependencewasrelatively

peaceful,asopposedtotheyears-longwarsoftheSpanish-andBritish-Americancolonies.

Emergingwithadiplomaticallyrecognizedandconstitutionalmonarchy,basedonitsEuropean

antecedents,offeredasemblanceofpoliticalstability.24IncontrastwiththeformerSpanish

colonies,thealteredpoliticalstatusdidnotraisequestionsaboutwhothesovereignwas.From

adistance,thestateseemedtoclearalowstandardoffiscalrectitude.25Thecountry’sexport

performance,reputationfornaturalresourcewealth,anditspotentialasatradingpartner

furthersustainedeconomicexpectations.26

Offsettingthesepoliticalbenefits,Portuguese(andBritish)recognitionofBrazilian

independencerequiredthatBrazilcompensatePortuguesecitizensforpropertyremainingin

theformercolonyandassumeresponsibilityforPortuguese1823loan,incurredinLondon;

theseobligationstotaled£2million.Althoughtheliteratureisvague,honoringthisagreement

wasanexpectationembeddedwithinBrazil’sfirstsovereignloansin1824and1825.27Over

time,Brazildidnotenterintototaldefault;butneitherdidtheTreasuryremainincomplete

24Infact,inasurveyof“TheSovereignsofEurope”TheTimesincluded“theEmperorofBrazil,whobelongstoanEuropeandynasty.”(TheTimes(London)11January1850.)25In1830,Brazilcarriedalowerlevelofforeigndebtserviceobligation,relativetogovernmentrevenues,thandidtheSpanishAmericanrepublics.(Vizcarra,Table3.)26ForanexcellentexampleoftheoptimismwithwhichEuropeansviewedBrazil,seeJohannJakobSturz,AReview,Financial,Statistical,&Commercial,oftheEmpireofBrazilandItsResources:TogetherwithaSuggestionoftheExpediencyandModeofAdmittingBrazilianandOtherForeignSugarsintoGreatBritainforRefiningandExportation(Wilson,1837).RecentscholarshipreinforcestheconclusionofBrazil’sexportdynamismforthefirstthreedecadesoftheindependence.(C.AbsellandA.Tena-Junguito,"BrazilianExportGrowthandDivergenceintheTropicsDuringtheNineteenthCentury,"JournalofLatinAmericanStudies(2016).)Populationgrowth,largelyrelatedtoslaveimportsresultedinthestabilityofGDPpercapita,ratherthanitsgrowth.(GiovanniFedericoandAntonioTena-Junguito,"ExportsandAmericanDivergence.LostDecadesandEmancipationCollapseinLatinAmericaandtheCaribbean:1820-1870,"inWorkingPapersinEconomicHistoryWP17-01(Madrid:UniversidadCarlosIII,2017).)Butthatconstratintdidnotaffecttheabilitytoserviceinternationaldebt.27Bouças;MarcelodePaivaAbreu,"ADívidaPúblicaExternaDoBrasil,1824-1931,"EstudosEconômicos;(InstitutodePesquisasEconômicas,UniversidadedeSãoPaulo)15,no.2(1985);Marichal;Summerhill.Summerhillistheexceptioninthecategorizationoftheloans;herefersonlytodeficitfinance;theotheranalystsrefertothePortugueseobligationsasjustification,atleastpartially,fortheloans.Tomyknowledge,nothingspecifiedwhethertheBrazilianswouldredeemthefullamountofthedebtorsimplycontinuetomeettheservicingobligationsofdividendandsinkingfundpayments.

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compliancewiththetermsofits1824/25debt.Inadditiontosuspendingitspaymentsonthe

Portuguesedebtin1828uponchallengestocontinuedpoliticaltiesbetweenthetwostates,its

owndividendpaymentsandsinkingloanobligationswereofteninarrears.TheTreasuryentered

intoprivateloanswithitsBritishbankersin1828andagainfrom1832to1835,whichwere

subsequentlycapitalizedbyturningthemintopubliclyissuedloansinordertomeetdividend

obligations.From1828until1851,meetingthecommitmenttomaintainasinkingfundwas

irregularandrare.28

IncontrasttoBrazilianpartialcompliance,alloftheSpanishAmericanborrowers

enteredintodefaultwhentheydidnotmakescheduleddividendpaymentsinlate1826and

1827.Thispaperdemonstratesadifficultandlongpath,butaswithBrazil,thedebtswerere-

scheduledinthelate1840sandearly1850s.Bythelate1850s,whenLondoncapitalmarkets

enteredanewphaseofexpansion,theywereagainreceptivetoLatinAmericansovereigndebt.

THEDEBTCYCLE,1825-1852

ManyhistoriansandanalystshaveaddressedtheearliestfinancialmarketforLatin

Americanbondsintermsthatsuggestcommonalityamongborrowingsovereignstates.Thedata

suggesttheneedforamorefinelytunedassessment,whichcanparsesimilaritiesfrom

importantdifferences.AmongLatinAmericanstates,thedifferencesofexperienceswerewide;

riskpremiavariedsubstantiallyinlevels,timingofchangesanddynamics(Figure1andAppendix

Table.)Mostnotably,investorsidentifiedBrazilianbondswithalowerriskprofile.Throughout

thesetwenty-eightyears,Braziliandebtdidnotrequireariskpremiuminexcessof8.53

percentagepoints;SpanishAmericanbondsseldomcommandedapremiumthatlow.The

averagecostofriskonBrazilianbondsbetweenDecember1824andDecember1852was3.52

percent,amarkupofmorethan100percentovertheconsolyield;themeanfortheSpanish

28Onthismatter,seetheconflictingopinionsinMFR1843:14andRAL000/401A/7[undatedletter,1852]fromNMRtoBrazilianMinisterofFinance.

13

Americanrepublics(excludingColombia)rangedfrom10.19percent(Chile)to18.49(Peru)

percent(maximumsrangedfrom36.56percentto63.29percent.)Beyondtheirlevel,therisk

premiumattachedtoBrazilianbondsalsowasmorestablethanthoseoftheSpanishAmerican

issues,asdemonstratedbythelowerstandarddeviation(ofthefirstdifferenceforweekly

premia,Table2A.)

InvestorsoftenconflatedtheirassessmentsofBrazilianandPortuguese

creditworthiness(Figure3)reflectingthenations’intertwinedpoliticalandfinancial

circumstances.Theriskpremiarequiredofeachwererelativelysimilarandcloselycorrelated,

butattimes,reflectedtheuncertaintyoftheirentwinedgovernancedebatesandthe

PortugueseCivilWar.Thereversalintheorderofthelevelafter1828,discussedbelow,was

permanent.

ComparisonoftheBrazilianexperiencewiththe“healthy”Europeanborrowersoffersa

verydifferentinterpretationfromthoserelativetoSpanishAmericaandPortugal.Brazilcould

notpassasa“healthy”borrower(Figure4.)Theconsistentlylow,decliningandrelativelystable

premiaweresignificantadvantagesfornewlyemergingEuropeanborrowerswhomettheirdebt

servicingobligations.TheseadvantagesdidnotaccruetotheBrazilians.Denmark,thelowest

costborrower,realizedanaverageriskpremiumof97basispoints(0.97%)anditsmaximum

reached2.25percent,adifferentialofgreaterthan2.5-foldrelativetotheBraziliantrends(3.52

and8.53percentforthemeanandmaximum,respectively.)

Nevertheless,thegeneralrelationshipsbetweenthebondseriesdemonstrated

importantsimilaritiesacrossalloftheperiods;shiftsoflevelanddirectionofchangeduring

crucialyearsalsogenerateusefulfindings.Assessingspecificperiodswithinthisdebtcycle

allowsforinsightonthebalancebetweengeneralmarketforcesandcountry-specificconditions

inthetrajectoryofsovereigndebtinearlyglobalfinancialmarkets.

14

EARLYCRISIS,DEFAULT&IMMEDIATEAFTERMATH:1825-JUNE1830

Bytheendof1824,whenBrazilianbondsbegantrading,allofthenewlyindependent

LatinAmericanstateshadborrowedinLondon.29AsFigure1reveals,investorperceptionof

creditworthinesswasestablishedfromthebeginningofthecycle,inincreasingorderofrisk:

Brazil,MexicoandPeru;thebondsofBuenosAires,ChileandColombiafellintoanintermediate

range.However,alloftheriskpremiafellwithinarelativelynarrowrangeuntillate1825,when

divergencebegan.Marketfluctuations,asconnotedbythechangingconsolyield,weresmall

whencomparedtothevariabilityexhibitedbytheLatinAmericanbonds:thestandarddeviation

ofweeklyyieldchangewaslessthanone-halfofanyotherbondseries,andone-fifthtoone-

eighthoftheLatinAmericanbonds(Table2A.)WiththeexceptionofChileandAustria,all

weeklychangesofriskpremiawerecorrelated,atastatisticallysignificantlevel,with

fluctuationsintheconsolyield(Table2B.)

EvidencefromtheconsolsuggeststhattheheightoftheLondonfinancialcrisisoccurred

inFebruary-March1826,whentheyieldhoveredaround3.95percent.Riskpremiaforother

sovereignborrowersroseintandemwiththeconsolyield.TheriskattributedtoBrazilian,

RussianandDanishbondsalsoreachedtheirhighestleveloftheperiodwithinathree-week

windowofthemarketcrisis.TheheightoftheLatinAmericanriskassessmentsclusteredtightly

afewmonthslater,inthefirsthalfofJuly1826,whenallofthenewstates’bondspeaked

simultaneouslywithasecondarypeakoftheconsolyield(Table3.)

ResolutionoftheLondonbankingcrisisoccurredrapidlyin1826,asdemonstratedby

thedecliningbenchmark(Figure2.)OutcomesvariedfortheLatinAmericanborrowers.Shortly

priortothegeneralizedclusteringofJuly,Perutriggeredthefirstsovereigndefaultwhenit

failedtopayitsscheduleddividendon15April1826.AttemptstorenegotiatetheColombian

29In1825,secondtranchesofloanswereextendedforBrazil,MexicoandPeru;Guatemala(ortheCentralAmericanRepublic)contractedaloanin1825,whichinvestorsfailedtosubscribe.

15

debtwerealsoflailing.DespiteincreasingriskpremiaforotherSpanishAmericandebt,neither

Brazilnorthemarketregisteredchangeinimmediateresponsetothedefault.InOctober1827,

MexicowasthelastSpanishAmericaborrowertodefaultduringtheperiod.30Reserveswithheld

fromtheloanproceedstomeettheearlypaymentswereexhaustedandservicingthefull

obligationrequired(non-existent)currentrevenuesfromMexico.31Witharapidturnoverof

governinggroupsandwithoutasecuremeanstocapturecustomsrevenues(themajorsource

ofstatefinance)Mexicansdidnotmeetthedebtpayments.Shortlyafterward,Brazilianbonds

reflectednationalpoliticaluncertainties.During1828,theBrazilianTreasurysuspendedits

servicingofthePortuguesedebt32anditsownsinkingfundobligations,andittookonprivately

placedloansfromitsLondonbankerstomeetdividendpayments.Inconsequence,Brazilianrisk

premiaincreasednearly75basispoints,from4.28percentto5.05percentbetweenMarchand

April,despiteanimprovingmarketreturn.ThetrajectorybegantolookliketheirSpanish

Americancounterparts.However,theshiftingrelationshipbodeevenlesswellforPortugal,and

therelativeorderingofBrazilianandPortugueseriskpremiapermanentlyreversedinmid-1828,

whentheBrazilianbondsroutinelyrequiredlowerpremiathanthePortuguese,whichrelied

uponBrazilianpayment.33RiskpremiaofLatinAmericanbondsshowednodistinctclustering

duringthesedefaultsanddisruptions.

30BetweenSeptember1826andSeptember1827,Colombia,BuenosAiresandChilealsostoppedhonoringtheirdebtserviceobligations.31Salvucci,101.TheTimes[ofLondon]17February1826.32NewsofthePortugueseking’sdeathinLisbonarrivedinLondonon21March,andalsoprobablycontributedtotheBrazilianshort,sharpimprovement(whichdidnotoccurforthePortuguesebonds),supportinganexpectationthatPedrowouldaccedetothePortuguesethrone.ThegeneralexpectationwasthatPedrowouldassumeboththrones.Immediatelyon21March1826,TheTimes[ofLondon]publishedaneditorialanalyzingPedro’soptionsforclaimingsovereigntyoverBraziland/orPortugalthatanticipatedthatPedrowouldabandonclaimsonPortugal.33Inresponsetoadrawn-outsuccessiondisputebetweentheemperorofBrazilandhisbrotherforthethroneofPortugal(whichescalatedtoaPortuguesecivilwar),in1828,theBrazilianTreasurysuspendedtheredemptionandloanpaymentsithadacceptedaspartofthetermsfordiplomaticrecognition.ThePortugueseenvoyinLondonattributeda20%declineonthepriceofPortuguesebondstouncertainty

16

TheLondonfinancialpressstronglyopinedthattheobligationsshouldhavebeenwell

withinthecapacityofborrowers.34Storiesofweakgovernance,fiscalrelianceonunreliable

customsrevenues,andretaininginitialreservesinLondonwithoutprovisionsforfuture

obligationswerecommoncharacteristicsthattheMexicandebtsharedwithotherSpanish

Americanrepublics.35Theywerepoliticallyfragileandfiscallyweak;butitisunclearthatspecific

eventsintheborrowingstatesprovidedtheproximateeventstotheirdefaults.36

Agroupofactorsdistinctfromborrowersandinvestors(thoughoftenoverlappingwith

investors)wereinstrumentalinthetrajectoriesoftheSpanishAmericandefaults.Thesewere

thebankers–ormoreaccurately,theintermediariesresponsibleforsellingbondstoinvestors.

FlandreauandFloresfindthatthesovereigndefaultsfollowed,ratherthanpreceded,thebank

failuresthatwerethehallmarksofthe1825/26crisis.37Duringthisperiod,weaksovereign

borrowersrelied–ortriedtorely–ontheirbankersforshort-termhelpinmakingdividend

payments.38TheTimespublishedon15and16February1826,“rumoursthatahouseconnected

withNorthandSouthAmericawasindifficulty,therewasageneralrushtosellthesecuritiesof

thenewly-formedstatesinthatquarteroftheworld.ColombianbondsandMexicanbonds

abouttheirstatus.(ANTTPT/TT/MFELivro483:12May1828(Palmellatounidentifiedrecipient.)Short-termreversalsoftheBrazilianadvantagereflectedperiodsofBrazilianpoliticalunrest.34“TheMoneyMarket”columnofTheTimesreferredtothePeruvianobligationas“atriflingsum,indeed,foracountrythewealthofwhichisproverbial”andforthewholeofLatinAmerica,theobligationswere“averysmallsumforthoserichcountries,ifanythinglikeprudenceorcommonhonestyistobefoundinthem.”"TheMoney-Market."Times[ofLondon]14April1826and20April1826,respectively.35OnPeruseeAlfonsoW.Quiroz,DomesticandForeignFinanceinModernPeru,1850-1950:FinancingVisionsofDevelopment,PittLatinAmericanSeries(Pittsburgh:UniversityofPittsburghPress,1993).OnArgentinaseeSamuelAmaral,"ElEmpréstitoDeLondresDe1824,"DesarrolloEconómico(1984);DCMPlatt,"ForeignFinanceinArgentinafortheFirstHalf-CenturyofIndependence,"JournalofLatinAmericanStudies15,no.01(1983).36Further,theonenaturalexperimentatthetime,suggestedthepossibilityofavoidingcompletedefault.37FlandreauandFlores,659.DawsonandMarichalbothobservethesametiming.ThecontributionofFlandreauandFloresistodrawthelargerimplicationsofthesequenceofevents.38Salvucci,101-05;MichaelPCosteloe,BondsandBondholders:BritishInvestorsandMexico'sForeignDebt,1824-1888(PraegerPublishers,2003).CosteloestatesthatmostofthebankersissuingSpanishAmericanbondswerenotamongtheprominentLondonfirms.WiththeexceptionsofN.M.RothschildandBaringBrothers,theyhadshortlives(p.xix)

17

wereofferedforsaleatpricesfarbelowthoseofthemarketatthetime.”Thefollowingday’s

newsannouncedthefailureof“theeminenthouseofMessrs.B.A.Goldschmidt&Co.”39Barclay

Herring&Richardson,thebankissuingMexico’ssecondloanin1825(andGuatemala’s

attemptedloan)alsofailedin1826.Incontrast,Rothschild,Brazil’sbankers,continuedto

supportitsdividendpaymentobligationswithshort-termloanstomeetdividendpayments.40

RothschildandThomasWilson&Co.(thesuccessortothefailedissuersoftheBrazilian1824

loan)laterconvertedthesebridgeloansintoanequivalentamountoflong-termbonds–the

loanof1829.Doingsotransferredthebankers’individualshort-termrisktoalargerpoolof

lendersforthirtyyears.

Bythefirsthalfof1830,allofthesovereignbondshadrealizedstrongrecovery,as

demonstratedbythetroughsoftheirriskpremiaandconsolyield(Table3andFigure1.)Within

weeksaftertheconsolreacheditslowestyield,thehealthyEuropeanborrowersfollowedin

JanuaryandFebruaryof1830.TheLatinAmerican(andPortuguese)bondriskassessments

realizedtheirmaximumimprovementdidnotoccuruntillateApril/earlyMay,andthey

clusteredwithinashortertimeframethantheEuropeanimprovement(Table3.)Thearrivalof

transatlanticpoliticalnewsdoesnotseemtoexplainthenearlysimultaneoustimingoftheend

ofimprovingtrends;rather,marketimprovementwastheclosestproximateeventtothis

change.

ThisexplorationofthenewlyindependentLatinAmericanstatesintheirfirstyearsas

internationalborrowerssuggeststhatlargeanddetrimentalconsequencestotheseborrowers

39TheTimes[ofLondon]15and16February1826.Foritspart,TheTimesopinedthat“itisremarkablehowextremelyslighttheinfluenceonlatepoliticaleventsonthevalueofforeignsecurities,”citingPortugal,BrazilandBuenosAiresasspecificexamples.(22March1826.)Salvucci(103)referstorumorsthatBaringBros.(whichhadtakenuptheroleofagentfortheMexicanloan)wouldhonorthepaymentonwhichMexicodefaulted.40EvidencesuggeststhatRothschildlendingtosupportBraziliandividendpaymentsmayhavebegunasearlyasJanuary1826.(RALXI65/0B,6January1826.Itisalsointerestingthat,immediatelypriortoBraziliansuspensionofpaymentsonthePortugueseobligation,theTreasuryrepresentativeinLondoncommissionedRothschildtopurchasePortuguesebonds.(RALXI65/1B27February1828.)

18

fromrelativelysmalldisruptionsintheglobalcapitalmarketcompoundedtheeffectsof

domesticinstability.Thestresseddebtorsdidwhattheycouldtoavoiddefault–borrowingfrom

theirbankersandpiecingtogetherminimalpayments.Thesemethodswerenotnew.The

SpanishAmericansovereignsbegantodefaultwhen,followingtheLondoncrisisof1825,their

bankersfailedandthecostsofcompliancebecameveryhigh,asdemonstratedbytherisk

premiaofthefollowingmonths.ThedifferencesbetweenBrazilandtheSpanishAmericansmay

haveincludedthatN.M.Rothschild&Co.,Brazil’sbanker,survivedandthecosttotheBrazilian

stateofconsolidatinglegitimacywaslowerthanforitsneighbors.

WhilealloftheLatinAmericanstatessufferedfrompoliticalinstabilityandveryweak

fiscalbasesthatdependedoverwhelminglyoncustomsrevenues,thetimingofthedefaults

reflectedthestateoffinancialmarketsinLondon.InvestorsdeemedBrazilianbondstobemore

stablethantheSpanishAmericans,asmeasuredbythestandarddeviationofriskpremium

change.Further,changingriskassessmentofallborrowers,exceptBuenosAiresandAustria,

wascloselyassociatedwithmarketrisk(measuredbythebivariatecorrelationofchange.)

RatherthanLatinAmericanstatescreatingafinancialcrisis,inthisinstance,effectsfromthe

domesticLondonmarketstronglydeterminedtheresultsfortheLatinAmericanstates.Evenin

default,theirbondscontinuedtotradewithincreasesofpremiathatreflectedtheirnewlyrisky

assessments.

INTERIMYEARS:JULY1830-1844

Forthelonginterimfrommid-1830through1844,theglobalfinancialbenchmark

remainedrelativelystable.Thelongdurationofthisperiod,relativetotheothersinthispaper,

renderitinappropriatefordetailedempiricalanalysisofthebondseries’fluctuations.In

summary,thelevelandrelativestability(standarddeviationofweeklychange)ofBrazilianrisk

premiumremainednotablylowerandmorestablethanfortheSpanishAmericanbonds(Table

19

2A.)Allofthedefaultedborrowers,aswellasnon-compliantBrazil,engagedineffortsto

stabilizetheirfinancialpositions,andresolvetheirinternationaldebtsituations.41Therisk

premiaattachedtoLatinAmericanbondsfollowedmajorpoliticaleventsandrenegotiation

effortsofeachnationanddemonstratedwidediversity.42

TheBrazilianstateexperiencedtwodisruptionsduringtheseyears,whichappearedin

itsriskpremiumtrend.In1831,theemperorofBrazilreturnedtoPortugal,exertinghisclaimon

thePortuguesecrown.Thisepisodeoccurredimmediatelyaftertheonlypoliticaldebatewithin

theBrazilianlegislaturewithrespecttopossibledefaultontheLondonloan.43Brazilianbonds

requiredasignificantlyincreasedriskpremiumsimultaneouslywiththenewsoftheemperor’s

abdication,followedbyaslow2-yearimprovingtrendthatreturnedtoapproximatelythelevel

priortotheepisode.Subsequently,privatecreditorswhohadsupportedbonddividend

paymentscapitalizedtheirprivateloansintolong-termbondsin1839,withonlyamodest

disruption(about30basispoints)tothetrendoftheriskpremiumonthe1824/25loan.44Non-

compliancewithitssinkingfundobligationscontinuedthroughouttheseyears.In1841,the

BrazilianTreasuryministrypubliclyandexplicitlystatedthatitdidnotbelievethatcoming

41Stabilizinginternationalfinancialpositionsproceededintandemwithawidearrayofotherstate-buildingeffortsineachnewlyindependentterritory.Theseeffortshaveformedthebulkofnineteenthcenturypoliticalhistoriography.42Totracespecificefforts,seeCharlesFenn,Fenn'sCompendiumoftheEnglishandForeignFunds,DebtsandRevenuesofAllNations:Banks,Railways,Mines,andthePrincipalJointStockCompanies:ForminganEpitomeoftheVariousObjectsofInvestmentandSpeculationWhichAreNegotiableinLondon(London:E.Wilson,1855),138-43,90-210,91.43TheTimesof2June1831reportedontheabdication;butnewsofthedebateoverapotentialdefaultseemstohavenotreachedLondon,atleastthroughthenewspapers.WhilethefailureofthisdebatemayhavecontributedtothedecisiontoreturntoLisbon(Summerhill.,Chapter4,)theEmperorhadplentyofmotivationinthedesiretokeepwholetheBragançaempireandtoquellanti-foreignrebellionsbyremovinghimselfinfavorofhisBrazilian-bornson.(RoderickJ.Barman,Brazil:TheForgingofaNation,1798-1852(Stanford,Calif.:StanfordUniversityPress,1988).44Inanindirectsense,capitalizingtheprivateloansdemonstratedareputationalstrengththattheBrazilianshad,andothersdidnot.PrivatelenderswerewillingtoadvancefundstotheBrazilianTreasurytomeetthedividendobligations,andtheywerealsoabletoconverttheloanstolong-termbonds.NoneoftheSpanishAmericanborrowerswereabletofindsimilarsupporttokeepthemafloat.

20

currentonthesepaymentswouldaffectitsabilitytoaccessloansinLondon;45inotherwords,

thecostofre-negotiatingthedebtwouldnotbenefitBrazil.Nevertheless,afterthe1842

agreementwithPortugaltosettlepoliticalandfinancialclaims(whichincludedanewdebtissue

of£0.6millionin1843tocompletethepersonalindemnificationagreementof1825)andthe

beginningofcomprehensivefiscalreformsin1844,46thecostofsovereignriskdeclinedona

sustainedtrajectory.

ThestrongestassociationbetweenbondseriesoccurredbetweenBrazilandPortugal.

Bothsetsofbondsexperiencedlargeswingsinprices(andhence,premia)fromthelate1820s

throughthe1840s.However,fluctuationwasstrongerforthePortuguesebonds.47Notably

abruptspikesforPortugalin1836and1842reflecteduncertaintiesabouttheresolutionofthe

PortuguesecivilwarandBrazilianresumptionofPortuguesedebt.Theydemonstratedinvestors’

recognitionthatredemptionofthePortugueseobligationrestedwithBraziliancompliance.Even

so,asearlyas1833Braziliansalsoseemedtobelievethattheyalsopaidapriceforthe

uncertaintyofthePortuguesesituation,withtheTreasuryMinistercitingitasonereasonthat

pricesforBrazilianbondsremainedlow.48

RiskassessmentsfortheSpanishAmericanborrowersweresimilarlyresponsivetotheir

circumstancesfrom1830through1844.Agreementbetweeninvestorsandrepresentativesof

45MFR1843:14.46Fiscalreformsfrom1844to1846includedrestructuringcustomslevelsandcollectionwiththeexpirationofthefirstAnglo-BrazilianCommercialtreaty,providingfordebtpayments,consolidatingdomesticpublicdebt,legislatingnewtaxesandattemptingmonetaryreform.(LiberatoCastroCarreira,HistóriaFinanceiraEOrçamentáriaDoImpérioDoBrasil,2vols.(BrasíliaandRiodeJaneiro:SenadoFederal;FundaçãoCasadeRuiBarbosa,MEC,1980[1889]).-1847;ThiagoFontelasRosadoGambi,OBancoDaOrdem:PolíTicaEFinançasNoImpéRioBrasileiro(1853-1866)(SãoPaulo,SP:AlamedaCasaEditorial,2015);Brasil.MinistériodaFazenda,"RelatórioApresentadoAoPresidenteDaRepúblicaDosEstadosUnidosDoBrasilPeloMinistroDeEstadoDosNegóciosDaFazenda,"(RiodeJaneiro:ImprensaNacional,variousyears).47OneresultofthesesharpanomaliesisthehigherstandarddeviationofriskpremiumchangeforPortuguesebonds(AppendixTable.)AhypothesisfortheseanomaliesisthattheycorrespondtothePortugueseCivilWarandsuccessionstrugglethattookplaceduringtheseyears.However,thathypothesisrequiresadeeperdiveintoPortuguesepoliticalhistorythanthispaperallows.48MFR1833:9;MFR1834:8-9

21

theMexicantreasuryinlate1836occurredsimultaneouslywiththesecessionofTexas.

ControversywithinMexicodelayedthebondexchangethatsignifiedtheagreementuntillate

1839.Defaultwasimmediate;investorswerenotsurprisedanddisruptiontotheriskpremium

wasshort-lived.Mexicanbondscontinuedtofollowthetrajectoryofitscivilwars.49InPeru,the

slowconsolidationofanationalgovernmentandthecommercializationofguanodeposits

contributedtoimprovingexpectationsafter1840.50Twoadditionalrestructuringswerenotable,

evenwithevenwithlittledataorinformation.ThedebtofGranColombiadevolvedin1834to

itssuccessorstatesofNewGrenada,EcuadorandVenezuela,withoutanyofthemresolving

theirfinancialandfiscalproblems.AnotableexceptiontothedriftofotherSpanishAmerican

experiencewasChile’ssuccessfulrenegotiationin1842.WithearlyresolutionoftheChilean

default,itsbondshadbeguntotradeinthesamerange(levelandfluctuation)astheBrazilian.

Althoughotherborrowerswereunabletoresolvetheirproblems,theycontinuedto

demonstrateareadinesstoworktowardsresolutionandinvestorsremainedwillingtotradein

thebonds.51

Onereflectionoftheincreasedweightofindividualcircumstanceindetermining

sovereignbondriskduringtheseyearswastheoccurrenceofonlyoneeventofclusteringof

peakpremiaamongtheLatinAmericanbonds.InlateOctober/earlyNovember1831,Mexico,

49FormoredetailsonthiscontroversyseeSalvucci,Chapter3.50Debtre-negotiationsthatspecifiedone-halfofguanoearningsasthesecurityforPeruviandebtoccurredasearlyas1842.(Mathew,83.TheTimes(London)12February1848)51By1830,CommitteesofBondholdersbegantoformasameanstorepresentbondholderinterestsinre-negotiatingdefaulteddebt.TheCommitteeofMexicanBondholderslaterconsolidatedwithinvestors’committeesattemptingtorestructureSpanishAmericansovereigndefaults.Thesecommittees,withstrongerpersuasivethanstatutorypowers,tookincreasinglystrongrolesinrenegotiations.Asinfluentialbankers,merchantsandlarge-scalebondholders,,themembers’purposestorepresenttheinterestsofallbondholders,ascomparedtotheinterestsofcommitteememberswasoftenchallenged.Butbythelate1840stheygainedeffectivenessinboththeMexicanandPeruviannegotiations.(Costeloe,Chapter4;AlfonsoW.Quiroz,"PublicDebtandtheDomesticFinancialStructureinPeru,1850-1914,"inLaDeudaPúBlicaEnAméRicaLatinaEnPerspectivaHistóRica:ThePublicDebtinLatinAmericainHistoricalPerspective,ed.ReinhardLiehr(Madrid;Vervuert:Iberoamericana,1995);Flandreau,AnthropologistsintheStockExchange:AFinancialHistoryofVictorianScience.

22

ArgentinaandBrazilsharedalocalizedpeak(Table3.)Nopoliticalorfinancialmarketnewsat

thistimeseemedtoexplainthistiming.

Bythemiddleofthe1840s,LatinAmericanborrowersfacedageneralenvironmentof

decliningriskassessment.Withmuchunevenness,ageneraltrendofdecliningriskattachedto

LatinAmericandebtwasdiscerniblebythemid-1840s(Figure1.)

DISRUPTION:1845-1848

FollowingtheperiodofmarkettranquilityduringwhichLatinAmericanbonds

respondedtotheirownsovereignfortunes,thebroadermarketsinLondonpassedthrougha

periodofupheavalinthelate1840s.Economicandpoliticalconditionsdisruptedthecoreofthe

globalfinancialmarket.WithinBritain,anearlierboomincapitalformationtofinancerailroads

combinedwiththepressuresofcropfailurestoproduceamarketcrisis,includingBankof

EnglandinterventioninSeptemberthroughOctober1847.52Subsequently,“politicalconditions

onthecontinent,”beginningwithaFrenchRevolutioninFebruary1848,53riledthemarket.The

financialpressattributedtheshortperiodofincreasingriskassessmentsacrossallborrowers

andheavytradinginLondontothesepoliticalcrises.54Thestandarddeviationoftheweekly

changefortheconsolwassignificantlyhigherthanthepreviousandsubsequentperiods(Table

2A.)Thesharpdeterioration(increaseyield)ofthebenchmarkclusteredwithallofthe

sovereignbondsfrommid-Octobertomid-November(Table3.)

Therapidcorrectionprovedtobeofshortduration.Themarketyieldpeakedagainon7

52RudigerDornbuschandJacobA.Frenkel,"TheGoldStandardandtheBankofEnglandintheCrisisof1847,"inARetrospectiveontheClassicalGoldStandard,1821-1931,ed.MichaelD.BordoandAnnaJ.Schwartz(Chicago:UniversityofChicagoPress,1984);C.N.Ward-Perkins,"TheCommercialCrisisof1847,"OxfordEconomicPapers2,no.1(1950).53MilesTaylor,"The1848RevolutionsandtheBritishEmpire,"Past&Present,no.166(2000).On19February1848,TheTimesreferredtoa“glutonthemoneymarket”resultingfromuncertaintyonthecontinent.SuchaglutcouldhavebeencausedbyLondon-basedinvestorsliquidatingtheircontinentalinvestmentsorbycontinentalcapitalflowingtotherelativesafetyofLondon.Thistopicisbeyondscopeofthecurrentstudy.54TheTimes[ofLondon]3February,15February,anddailyfrom15February.

23

April1848(3.73percent);55butmarketreturnsthendeclinedatleastuntiltheendof1852.

BrazilandMexicoalsopeakedonthesamedate(5.53percentand31.99percent,respectively.)

Peru’speakoccurredafewweeksearlieron17March,at30.00percent.Bytheendof1848,the

LatinAmericandebtresumedthetrendofimprovingriskpremiathathadbegunintheearly

1840s.Thereturntotheearliertrendcontinuedatleastforthenextfour-and-a-halfyears,

through1852.Withpoliticalimprovementandseriousrenegotiations,especiallyincomparison

tothe“revolutions”plaguingcontinentalEuropein1848,theprospectforSpanishAmerican

sovereigndebtturnedbrighter.

PoliticalandfinancialcircumstanceswithinLatinAmericadidnotcloselytrack

fluctuationsintheirbonds’riskpremia.Perhapsmostnotably,amajorfinancialdisruptionfor

MexicoresultedfromtheMexican-AmericanWar(1846to1848)explainstherun-upinthecost

ofrisk.But,thewar’sresolutiondidnotgeneratecomparableimprovement(Figure1.)56Newsof

thetreatyendingtheMexican-AmericanWararrivedinLondonon7April1848;andsuddenly

Mexicanbondswere“theonlysecurityintheforeignmarketthatmaintain[ed]anydegreeof

steadiness”inthefaceofgeneralmarketuncertainty.57Evenso,theMexicanriskpremium

reachedalocalhighatthattime,alongwiththeotherLatinAmerican(andPortuguese)bonds.

IncomparisonwithMexico,theeffectsoffinancialdisruptioninLondonwereattenuatedin

Brazil.JustasthepoliticalnarrativeassociatedwithMexicodidnotcorrespondwiththe

trajectoryofitsLondonbonds,neitherdidBraziliancircumstancesexplainthetiming

fluctuation.Astableconservativegovernmentthatfocusedonfiscalreformgainedpowerand

55On22October1847theconsolyieldreachedaslightlyhigherlevel(3.77percent.)56TheTimes[London]14March1848.Theoriginalloansof1824and1825hadbeenguaranteedbyMexicanterritory.TheCommitteeofSpanishAmericanBondholderstookthepositionthatcedingterritorytotheU.S.carriedtheobligationtohonoritsmortgagebyrepayingtheloans.(Costeloe,72.)Notwithstandingtheoptimisticenvironmenttheseeventsprojected,theMexicandebtre-negotiationwasnotresurrecteduntil1849.Thecollapseofre-negotiateddebtagreementin1847hadlittleeffectonMexicanyields.(Anearlierattempttorenegotiate,in1836,hadsimilarlybeeninterruptedbyTexas’sdeclarationofindependencefromMexico.(ibid.,65-75;Salvucci.))57TheTimes[ofLondon]7April1848.

24

longevityinBrazilinMay1848.58AlthoughtheBraziliangovernmentwasabletoimplement

significanteconomicandfiscalreform,itsoutcomewasveryuncertaininitsfirstyears,andone

lastmajorlocalpoliticaluprisingoccurredinNovember1848.Brazilianriskpremium

improvementanticipateddomesticcircumstances.ThePeruvianloanofwasre-negotiatedto

includecontractualguaranteesofpaymentfromguanorevenuesduring1847and1848;butit

wasnotsigneduntilJanuary1849.59KnowledgeoftheseeventsdidnotarriveinLondonintime

tothetimingoftheclusteredpeaksorthesubsequentsustaineddecliningtrend.

RESOLUTION:1849-1852

After1848,theLondonmarketforsovereignbondsreturnedtostabilityquickly,as

denotedbylowerriskassessmentsandimprovedstability(standarddeviationsofweekly

change,Table2A.)Duringtheseyears,themajorLatinAmericansovereigndebtdefaultswere

resolved.60Mexico,PeruandBrazilinvokedverydifferentstrategiestoaccomplishthisoutcome,

andeachrequiredsustainedeffortsthatbeganinthemid1840s.From1842,thePeruvian

governmentattemptedtorenegotiateitsdebt,basedonguanorevenues,butdidnotfindthe

willtodosoforanothersixyears.DespiteMexicaneffortstorenegotiateasearlyas1830and

1837,successfulrestructuringofthedebtoccurredin1850andreliedheavilyonthe

commitmentofproceedsfromthesettlementoftheMexican-AmericanWarin1849.61Brazil

didnotbenefitfromasimilarlyexogenouswindfall.SlowfiscalrestructuringalloweditsTreasury

tobecomecurrentonthedelayedsinkingfundobligationsandtoresumepaymentsthat

reorganizedthePortugueseobligationswithloansin1843and1852.

58TheConservativegovernmentledbyEusébioQueiróslasteduntil1853,incontrasttothequicksuccessionofsixLiberalCabinetsfromFebruary1844toSeptember1848.JeffreyD.Needell,ThePartyofOrder:TheConservatives,theState,andSlaveryintheBrazilianMonarchy,1831-1871(Stanford,Calif.:StanfordUniversityPress,2006),108.59Mathew;Vizcarra.60InArgentina,thedefeatofManualRosasin1852preparedthewayforconfederatingtheArgentineRepublicin1853andsettlingthedebtin1857(Marichal,Table2.)61Thisrestructuringonlylasteduntil1856.ThebestEnglish-languagesummaryoftherestructuringininMarichal(61-67.)

25

Resolutionofthesethreeimportantsovereigndebtdelinquenciesoccurredwithinthe

1849-1852period.Decliningandrelativelystableriskpremiacharacterizedtheirinternational

debtexperiencefrom1849through1852.62PeruandChile,thestatesthatmoststrongly

improvedtheirpoliticalandfinancialstabilityatleastforafewyears,63sawtheirsovereignrisk

declinetoapproximatelythelevelsoftheBrazilianbonds.Theydidnotimprovebeyondthat

level.Further,incrementallending,beyondrestructuringtheoriginalloans,didnotoccur.

Decreasedcorrelationbetweennationalriskpremiafluctuationsandthemarket

coincidedwithbothrapidlydeclining(improving)LatinAmericanpremiaandtheresolutionof

debtservicingirregularities.64RiskpremiaforalloftheLatinAmericanbondsbecamemore

independentofthemarket;thetimingofyieldimprovementandeffectsofmarketstresscaused

littledisruption.Further,by1849-1852,theriskpremiafluctuationwasindependentofthe

marketyield(Table2B,)suggestingthatinvestorshad“learned”howtoassesssovereignriskin

anincreasinglysophisticatedmanner.

CONCLUSION

Thispapergeneratesthreeconclusionswithrespecttothefirstmodernglobalsovereign

debtcycle.First,thetimingofdefaultandresolutionmorestronglyreflectedmarketdynamics

thantheydidcountry-specificevents.Detailedchronologyofthefluctuatingcostofsovereign

riskforLatinAmericaborrowersoverthetwenty-eightyearsoftheirfirstborrowingcycle

demonstratesthatperiodsofmarketdeteriorationeasilyovercametheindividualcircumstances

62Marichal,59-60andChapter3.OnPeru,seealsoMathew,93;Quiroz,"PublicDebtandtheDomesticFinancialStructureinPeru,1850-1914."QuirozattributestheinfluenceofdomesticcreditorsinmotivatingthePeruviansettlementinLondon.63TheArgentineyieldstabilizedatanotablyhigherlevel,andtheMexicanyieldremainedlowerthanpreviouslywithsignificantperiodsoffluctuations.64Asintheperiodfrom1825to1829,BrazilianyieldfluctuationrespondedmorestronglytomarketshocksthandidtheMexicanorPeruvianseries.Thisremainsafindinglookingforanexplanation.

26

ofindividualborrowers.Marketimprovementhadlessimpactontheweaker,newly

independentsovereignsthandidmarketdeterioration.

Second,fallingintoirremediableproblemsoccurredwithinaveryshortperiod;coming

outofthemrequiredalmostthreedecades.Whilethefailuresofthebankinghousesthatwere

responsibleforthetransactionstoservicethebondsmayhavecontributedtothetimingof

SpanishAmericandefaults,theydonotexplaintheprolongedperiodthatthedefaulting

sovereignsrequiredtoresolvethedefaults.AlloftheLatinAmericanstatesre-negotiatedtheir

internationaldebt.Overthelong-term,andinnon-linearfashion,doingsocouldbeinterpreted

asasignofhavingestablishedcredibilityandlegitimacy.Bythelate1850s,averyactiveglobal

capitalmarketwasnewlyreceptivetoLatinAmericansovereignborrowingforpurposesofboth

refinancingandinfrastructureconstruction.65Returntocreditworthiness(howeverfleetingfor

someborrowers)requiredexpandedglobaltrade,withactiveparticipationbyLatinAmericans,

anddomesticconsolidationofgovernanceandfiscalsystems.Butnothingmotivatedareturnto

creditworthinesswithoutrenewedexpansionofLondoncapitalmarkets,beginninginthemid-

1840s;i.e.,acomingtogetheroftheglobalandthelocalwasnecessary.Whilethisconclusion

soundsstraightforward,italsocarriestheimplicationthatfiscalrectitudeandwillingnessare

notsufficientforsovereignaccesstoglobalcapitalmarkets.

Thetrajectoryandclusteringofriskpremiumfluctuations,combinedwiththegeneral

trendofdecliningbi-variatecorrelationbetweenyieldandriskpremiumchange,acrossall

bonds,suggeststhatimportantlearningtookplacetoallowincreasinglyindependentand

65Marichal,AppendixA.

27

rigoroussovereignriskanalysis.Thisrelationshipimposesmethodologicalstrictures66also

highlightsdifferenttreatmentfor“emerging”and“healthy”borrowers.

Thepaper’sthirdconclusionisthatoneofthemostimportantfeaturesoftheglobal

financialmarketswasinoperationfromitsbeginning:afteroptimisticassessmentsthat

underpinnedtheextensionofcredit,creditorspunishedweakdebtorsinlargerdosesthanthey

didhealthyborrowers.ThehealthyEuropeanswerenotbuffetedbythevicissitudesofmarket

variation.ThepapercannotaddressthequestionofwhethertheSpanishAmericanstatescould

haveavoideddefaultintheabsenceoftheLondoncrisisof1825/26andthefailureoftheir

bankers.Brazilofferedametricof“success”forSpanishAmericandebt,intermsofitslevel,

stabilityandresponsetomarketforces,andresolveddefaultsdidnotlowerriskpremiabelow

thelevelofBrazilianbonds.However,theBraziliantrajectorydifferedinmagnitude,notin

nature.Moregenerally,thedynamicsthathavecometodefinetheglobalsovereignfinancial

marketforemergingeconomiesinthetwentiethandtwenty-firstcenturieswereoperativeat

thebeginningofthenineteenthcentury.

66Theearlierversionofthispaper,attemptingtoseparatetheeffectsofmarketchangefromchangingriskassessment,didgiveglimmersofevidencethatmarketriskcouldeasilyoutweighemergingsovereignriskinadeterioratingmarket,butdidnotdosoinanimprovingmarket.

28

DATAAPPENDIX:CONSTRUCTIONOFBONDPRICETIMESERIES

Britishconsol: 3%consolentireperiod

Brazil:the1824&1825bonds,whichweretradedinterchangeably,asoneseries,throughouttheperiod1824-1852.Otherbonds(1829,1839and1843)werenotregularlytradedandwerenotreplacementsforthe1824/25bonds.BuenosAires:Reportedasacontinualseries1824-1852.Noadditionalbondsissuedpriorto1852;dividendpaymentsresumedin1857.Chile:Reportedasacontinualseries1822-52.Dividendpaymentsresumedin1842,withanewbondissuedtomeetdividendarrears.Colombia:Serieswassplicedtogethertoreflectinterimrenegotiations:asfollows

Colombia22_6 tradedfrom 10May22 to 15Oct24Columbia24-5 22Oct24 17Jul46 -thende-listed

Timeseriesreflectsthereapportionmentoforiginalbondsattheendof1834,transferring50%oftheprincipletoEcuadorandVenezuela(bothimmediatelyindefault,sotheyarenotincluded.–seeCommitteeofSpanishAmericanBondholdersAnnualReport,p17)Colombia’sremainingbondwasde-listed17July1846(&isremovedfromtheindex.)Mexico:Serieswassplicedtogether,reflectinginterimrenegotiations,asfollows

Mexico24_5 tradedfrom 30April24 to 11Nov25Mexico25_5 18Nov25 1Nov39Mexico37_5 8Nov39 10Jul46Mexico46_5 17Jul46 18Jun52Mexico46_3 25Jun52

NB:unsuccessfulrenegotiationsarenotincludedhere.Peru:Serieswassplicedtogether,reflectinginterimrenegotiations,asfollows:

Peru24&25_6 tradedfrom 9Apr24 to 8Jun49Peru49_4 15Jun49 29Mar50Peru49_4.5 5Apr50 28Mar51Peru49_5 4Apr51 26Mar52Peru_6 2Apr52

Austria: Lastdatelisted16Mar49Denmark:Serieswassplicedasfollows:

Denmark22_5 tradedfrom 8Mar22 to 18Nov25Denmark25_3 25Nov25 20Jul49Denmark49_5 27Jul49

Portugal:Acontinualseries1823-52Russia:Serieswassplicedasfollows

Russia22_5 tradedfrom 31May22 29Mar50Russia50_4.5 5Apr50

Sovereignbondissuesthatwerenotactivelytraded(orquicklyfailed)thereforenotincluded:Greece1824&1825;Guatemala1825&1836;Naples1824;Spain1823&1835.

29

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RothschildArchive–London(RAL)RALXI/650A-XI/65/3B CorrespondenceFilesRAL000/401A-000/401B LoanContracts(withsomecorrespondenceattached)RAL000/424Boxes4-6 GeneralLedgerBalances

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tFigure 1 Latin American Borrowers - Risk Premium

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Figure 2 Consol Yield

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Figure 3 Brazil & Portugal - Risk Premium

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Figure 4 Brazil & "Healthy" Europe - Risk Premium

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Table1 LoansIssuedinLondonto"New"Borrowers,1820s

AmountofLoan(£million)

Borrower Contracted Issued Realized

CouponRate

IssuePrice Agent

1822 Chile 1.00 0.93 0.70 6 70 HullettBros

1822 Colombia 2.00 2.00 1.68 6 84 HerringGraham&Powles

1822 Denmark 3.00 2.00

5 77.5 AFHaldimand&Sons

1822 Peru 1.20 0.45 0.40 6 88 ThomKidder&Co

1822 Russia 6.45 3.55

5 82 Rothschild

1823 Austria 3.50 3.50

5 82 Rothschild

1823 Portugal 1.50 1.50

5 87 Thomas&W.King

1824 Brazil 1.69 1.69 0.90 5 75BaylettFarquhar&Co;Alexander&Co;WilsonShaw&Co

1824 BuenosAires 1.00 1.00 0.85 6 85 BaringBors

1824 Colombia 4.75 4.75 4.20 6 88.5 BAGoldschmidt

1824 Greece 0.80 0.80

5 59 ALaughman

1824 Mexico 3.20 3.20 1.86 5 58 BAGoldschmidt

1824 Naples 2.50 2.50

5 92.5 Rothschild

1824 Peru 0.75 0.75 0.62 6 82 ThomKidder&Co

1825 Brazil 2.00 2.00 1.70 5 85 Rothschild

1825 Denmark 5.50 3.50

3 75 ThomWilson&Co

1825 Greece 2.00 2.00

5 56.5 Ricardo&Co

1825 Guatemala 1.43 0.16 0.12 6 63 Barclay,Herring,Richardson&Co

1825 Mexico 3.20 3.20 2.87 6 86.75 Barclay,Herring,Richardson&Co

1825 Peru 0.62 0.62 0.48 6 78 ThomKidder&Co

1828 Spain 0.60 0.60

5 NA1829 Brazil 0.80 0.80 0.40 5 54 Rothschild;ThomWilson&Co

Sources: Castaing,John.CourseoftheExchange.London:1822-1843(various.)

Dawson(1990)AppendixTable.

Marichal(1989)Tables1&2.

Table2 WeeklyChange;StandardizedMeasures

2A.StandardDeviationofChange

1825-1852 Jan.25-June30 July30-Dec.44 Jan.45-Dec.48 Jan.49-Dec.52

ConsolYield 0.0080 0.0089 0.0065 0.0122 0.0051RiskPremium:

Brazil 0.0426 0.0488 0.0396 0.0565 0.0258BA 0.0715 0.0737 0.0698 0.0430 0.0758Chile 0.0662 0.0851 0.0646 0.0341 0.0219Colombia 0.0517 0.0648 0.0471 0.0282

Mexico 0.0505 0.0672 0.0463 0.0425 0.0473Peru 0.0767 0.0784 0.0618 0.1097 0.0743Portugal 0.0469 0.0424 0.0526 0.0410 0.0321Austria 0.0328 0.0372 0.0295 0.0221 0.0057Denmark 0.1294 0.0506 0.1185 0.3668 0.0263Russia 0.0433 0.0402 0.0362 0.0709 0.0366

2B.BivariateCorrelationofChangebetweenRiskPremiumandConsol

1825-1852 Jan.25-June30 July30-Dec.44 Jan.45-Dec.48 Jan.49-Dec.52

ConsolYield 1.000 1.000 1.000 1.000 1.000RiskPremium:

Brazil 0.189 ** 0.347 ** 0.254 ** 0.013 0.063BA 0.147 ** 0.181 0.327 ** 0.156 0.021Chile 0.089 0.233 * 0.158 -0.451 ** -0.293Colombia 0.368 ** 0.368 ** 0.381 ** 0.113 NAMexico 0.255 ** 0.331 ** 0.263 ** 0.310 ** 0.056Peru 0.250 ** 0.228 ** 0.400 ** 0.423 ** -0.114Portugal 0.225 ** 0.278 ** 0.248 ** 0.135 -0.053Austria -0.106 -0.175 0.076 -0.535 0.277Denmark -0.255 ** 0.282 ** 0.067 -0.817 ** -0.349 **

Russia -0.018 0.281 ** 0.049 -0.292 ** -0.011

BivariateCorrelation:Pearsoncoefficient,twotail

**Correlationissignificantatthe0.01level(2-tailed).

*Correlationissignificantatthe0.05level(2-tailed).

NACannotbecomputedbecauseatleastoneofthevariablesisconstant.

Source:SeeDataAppendixandAppendixTable.

Table3 ClusteringofSharpChangesinDirectionofRiskPremia/Consol

Peaks

TroughsDate Primary Secondary Date Primary Secondary1826

Jul1829-Jun30

Feb.10 Braz

Nov27,1829

ConsolFeb.17 Consol

Jan15,1830 Consol

Mar.3 Den,Rus Consol Jan22,1830 RusApr.14 Peru

Feb12,1830 Den

May12 Aus

Feb26,1830 Aus RusJul7 Peru Mar19,1830

Den

Jul.14 BA.,Chil,Col,MexConsol,Braz,Peru,Portugal Apr23,1830 Brazil Consol

Jul28 Portugal Apr30,1830 Port 1831

May7,1830 BA,Col,Peru

Jan14 Port

May14,1830 Mex Mar4

Consol May21,1830 Chile

Mar18 Consol Aus July44-June45 Apr8 Den

Aug2,1844 Chile

Apr15 Rus

Aug23,1844 RusAug12 Aus

Dec20,1844 Consol

Aug26 Per

Mar14,1845 Peru Sep16 Chil,Col

Mar21,1845 Brazil

Oct28 Mex Mar28,1845 Den Nov4 BA Mex May16,1845 Port

Nov11 Braz Jun6,1845 Mex1847

Jun27,1845 BA,Col

Apr23 Den,Rus Jun25 Aus

Oct15 Braz Oct22 Consol

Oct29 Chile,Peru Mex Nov5

Braz,Port,Aus,Den

Nov12 Mex Dec3 Port

1848

Mar17 Peru

Mar31 Rus Apr7 Consol,Braz,Mex,Port Peru,Rus Apr14 Arg Jun23 Col

Sep1 BA Peaksandtroughsofriskpremiaandconsolyieldforselectedperiods.

Selectionbasedonparticularlysharpchangesofdirectioninriskpremiaandconsolchange.PrimaryPeak/Trough:Highest/lowestriskpremium(orconsolyield)forthetimeperiod.SecondaryPeak/Trough:secondhighest/lowestriskpremium(orconsolyield)forthetimeperiod."Clusters"aredefinedasapeakortroughoccurringwithinsequentialweeksamongborrowersandareoutlined.

AppendixTable DescriptiveStatisticsofConsolYieldandRiskPremia

DescriptiveStatistics BivariateCorrelation

Level Change Level

Change

N

Minimum Maximum Mean

Std.Deviation Minimum Maximum Mean

Std.Deviation

CorrelationCoefficient

CorrelationCoefficient

Level Change

1825-1852 ConsolYield 2.96 3.97 3.3078 0.20 -0.07 0.07 -0.0003 0.0080 1.000

1.000

1287 1245

RiskPremium: Brazil 1.83 8.53 3.5247 1.21 -0.23 0.35 -0.0008 0.0426 0.680 ** 0.189 ** 1136 974

BA 2.98 36.56 13.3827 7.24 -0.45 0.17 -0.0115 0.0715 0.137 ** 0.147 ** 563 334Chile 2.54 53.49 10.1860 8.42 -0.30 0.40 -0.0035 0.0662 0.495 ** 0.089

610 323

Colombia 3.04 55.07 22.8085 10.05 -0.18 0.28 0.0022 0.0517 -0.224 ** 0.368 ** 815 714Mexico 2.91 47.65 14.2468 5.57 -0.46 0.30 0.0006 0.0505 0.097 ** 0.255 ** 1158 1037Peru 1.68 63.29 18.4937 12.69 -0.52 0.45 -0.0051 0.0767 0.395 ** 0.250 ** 802 588Portugal 1.75 8.81 3.9549 1.55 -0.34 0.26 -0.0011 0.0469 0.372 ** 0.225 ** 702 439Austria 1.09 7.47 1.6746 0.55 -0.09 0.13 0.0022 0.0328 0.306 ** -0.106

310 93

Denmark 0.00 2.25 0.9740 0.52 -1.73 1.91 -0.0008 0.1294 0.088 ** -0.255 ** 893 654Russia 0.94 2.99 1.4738 0.33 -0.36 0.33 -0.0003 0.0433 0.603 ** -0.018 1050 851Jan25-Jun30

ConsolYield 3.19 3.97 3.4857 0.19 -0.03 0.03 -0.0004 0.0089 1.000

1.000

231 220RiskPremium:

Brazil 2.41 6.19 4.2864 0.85 -0.23 0.26 0.0006 0.0488 0.493 ** 0.347 ** 216 193BA 2.98 26.62 9.4652 5.93 -0.41 0.17 -0.0031 0.0737 -0.144

0.181

153 100

Chile 3.38 33.54 14.2305 7.91 -0.25 0.40 0.0094 0.0851 -0.017

0.233 * 145 95Colombia 3.04 38.68 16.9064 9.45 -0.18 0.28 0.0078 0.0648 -0.154 * 0.368 ** 216 193Mexico 2.91 31.40 11.1354 7.90 -0.31 0.30 0.0029 0.0672 -0.290 ** 0.331 ** 221 201Peru 3.58 63.29 19.6162 12.64 -0.33 0.31 0.0035 0.0784 -0.071

0.228 ** 178 140

Portugal 2.16 8.42 4.2646 1.86 -0.13 0.26 0.0021 0.0424 -0.232 ** 0.278 ** 196 166Austria 1.48 2.05 1.7875 0.14 -0.09 0.13 0.0009 0.0372 0.212 * -0.175

109 47

Denmark 0.71 1.95 1.3090 0.28 -0.22 0.25 -0.0023 0.0506 0.437 ** 0.282 ** 213 189Russia 1.17 2.82 1.9108 0.33 -0.18 0.19 -0.0004 0.0402 0.770 ** 0.281 ** 224 207Jul30-Dec44

ConsolYield 2.97 3.97 3.3175 0.17 -0.04 0.03 -0.0004 0.0065 1.000

1.000

639 608RiskPremium:

Brazil 2.37 8.53 3.7536 1.32 -0.17 0.19 -0.0010 0.0396 0.683 ** 0.254 ** 579 502BA 3.73 36.56 20.0334 5.66 -0.34 0.15 -0.0161 0.0698 0.477 ** 0.327 ** 194 84Chile 2.65 53.49 12.3938 8.59 -0.30 0.31 -0.0123 0.0646 0.724 ** 0.158

293 154

Colombia 8.56 55.07 24.1015 9.31 -0.18 0.22 0.0006 0.0471 0.118 ** 0.381 ** 550 480Mexico 8.70 47.65 14.3424 3.69 -0.17 0.23 0.0003 0.0463 0.163 ** 0.263 ** 527 433Peru 12.03 56.44 28.0431 8.42 -0.22 0.20 -0.0061 0.0618 0.655 ** 0.400 ** 329 203Portugal 1.75 8.81 4.2015 1.46 -0.34 0.18 -0.0030 0.0526 0.688 ** 0.248 ** 360 212Austria 1.09 2.36 1.5329 0.27 -0.05 0.10 0.0028 0.0295 0.618 ** 0.076

167 39

Denmark 0.23 1.84 0.6935 0.25 -1.73 0.29 -0.0052 0.1185 0.651 ** 0.067

457 324Russia 0.94 1.88 1.3072 0.18 -0.21 0.22 0.0007 0.0362 0.649 ** 0.049 489 363

Appendix Table(cont.) DescriptiveStatisticsofConsolYieldandRiskPremia

DescriptiveStatistics BivariateCorrelation

Level Change Level

Change

N

Minimum Maximum Mean

Std.Deviation Minimum Maximum Mean

Std.Deviation

CorrelationCoefficient

CorrelationCoefficient

Level Change

Jan45-Dec48 ConsolYield 3.00 3.77 3.2773 0.21 -0.07 0.07 0.0006 0.0122 1.000

1.000

209 209

RiskPremium: Brazil 2.29 5.53 2.8983 0.49 -0.20 0.35 0.0030 0.0565 0.550 ** 0.013

167 133

BA 8.29 26.52 13.9317 5.30 -0.16 0.04 -0.0180 0.0430 0.819 ** 0.156

62 27Chile 2.80 4.00 3.1901 0.31 -0.07 0.08 0.0029 0.0341 0.737 ** -0.451 ** 87 43Colombia 29.40 39.85 34.3136 3.25 -0.08 0.03 -0.0051 0.0282 -0.184

0.113

49 41

Mexico 10.03 31.99 18.6424 6.08 -0.15 0.24 0.0014 0.0425 0.940 ** 0.310 ** 206 203Peru 7.12 26.30 14.1436 2.88 -0.52 0.31 -0.0198 0.1097 0.421 ** 0.423 ** 105 71Portugal 2.57 6.27 3.1137 0.62 -0.14 0.09 -0.0066 0.0410 0.484 ** 0.135

81 31

Austria 1.13 7.47 1.7695 1.53 -0.02 0.03 0.0007 0.0221 0.450 * -0.535

28 4Denmark 0.00 1.83 0.3590 0.32 -1.09 1.91 0.0387 0.3668 0.228 * -0.817 ** 89 44Russia 1.07 2.99 1.4118 0.34 -0.36 0.33 -0.0022 0.0709 0.478 ** -0.292 ** 153 113Jan49-Dec52

ConsolYield 2.96 3.36 3.1108 0.09 -0.02 0.02 -0.0006 0.0051 1.000

1.000

208 208RiskPremium:

Brazil 1.83 3.26 2.4188 0.33 -0.11 0.07 -0.0053 0.0258 0.867 ** 0.063

174 146BA 4.34 20.53 8.6755 3.50 -0.45 0.15 -0.0139 0.0758 0.805 ** 0.021

154 123

Chile 2.54 3.38 2.8364 0.21 -0.05 0.04 -0.0081 0.0219 0.753 ** -0.293

85 31Colombia

NA

NA

Mexico 7.94 18.02 12.9315 2.18 -0.46 0.08 -0.0021 0.0473 0.615 ** 0.056

204 200Peru 1.68 9.22 3.3105 1.59 -0.26 0.45 -0.0048 0.0743 0.694 ** -0.114

190 174

Portugal 1.92 3.71 2.7038 0.45 -0.06 0.07 0.0003 0.0321 0.846 ** -0.053

65 30Austria 3.01 3.31 3.1235 0.12 0.01 0.02 0.0181 0.0057 0.518

0.277

6 3

Denmark 1.22 2.25 1.8064 0.15 -0.09 0.11 -0.0009 0.0263 -0.094

-0.349 ** 134 97Russia 1.11 1.67 1.4360 0.11 -0.23 0.20 -0.0014 0.0366 0.498 ** -0.011 184 168

BivariateCorrelation:Pearsoncoefficient,twotail

**Correlationissignificantatthe0.01level(2-tailed).

*Correlationissignificantatthe0.05level(2-tailed).

NACannotbecomputedbecauseatleastoneofthevariablesisconstant.