Old Sins: Exchange clauses and European foreign lending in the 19th century - PowerPoint PPT Presentation

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Old Sins: Exchange clauses and European foreign lending in the 19th century

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Old Sins: Exchange clauses and European foreign lending in the 19th century By Marc Flandreau, Institut d Etudes Politiques de Paris and Nathan Sussman, – PowerPoint PPT presentation

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Title: Old Sins: Exchange clauses and European foreign lending in the 19th century


1
Old Sins Exchange clauses and European foreign
lending in the 19th century
  • By
  • Marc Flandreau,
  • Institut dEtudes Politiques de Paris
  • and
  • Nathan Sussman,
  • Hebrew University

2
A typical international bond the Chinese
Government 1913 Reorganization Gold Loan 
3
The fixed exchange rate clause
4
Goal understanding the logic of these clauses
  • Liability  goldization ,  sterlingization ,
     francization , .
  • Widespread phenomenon
  • Dangerous (record of the 1890s)
  • More important problem than short term debt

5
Prehistory some facts
  • Very old practice 18th century
  • 19th century development  Rothschild packages 
  • Gold and silver clauses up to 1873
  • Triumph of gold clauses with spread of gold
    standard
  • Key currencies sterling, francs, marks, florins.

6
Contemporary explanations?
  • Nominal illusion  investors want fixed income
    in francs, sterling etc 
  • Information asymetries  investors do not
    understand exchange rate matters 
  • Institutions and credibility  currency clauses
    are guarantees .

7
FX clauses and credibility doubts
Country Year Yield Yield at issue
Brazil 1824 5 6.6
1825 5 5.9
1829 5 9.2
Buenos Aires 1824 6 7
Chili 1822 6 8.6
Colombia 1822 6 7.1
1824 6 6.8
Guatemala 1825 6 9.5
Mexico 1824 5 8.6
1825 6 6.9
Peru 1822 6 6.8
1824 6 7.3
1825 6 7.7
8
FX clauses and credibility further doubts
Group I Only exchange rate clauses Group II Mixed Group III domestic
Europe Denmark, Finland, Greece, Hungary, Norway, Poland, Romania, Sweden. Latin America Argentina, Bolivia, Brazil, Chile, Columbia,Costa-Rica, Dominican Republic, Ecuador, Guatemala, Haïti, Honduras, Mexico, Paraguay,Peru, Uruguay, Venezuela. Africa and Middle East Egypt, Liberia, Turkey, Tunisia, Transvaal. English Speaking and Dominions USA, Canada, Australia, New Zealand, India, Other British colonies. Asia China, Japan Europe Austria, Italy, Portugal, Russia, Spain, France Europe Germany, Belgium, Great Britain, Holland Switzerland
9
Primary markets, secondary markets, FX clauses
  • Getting the facts right
  • IPO and currency clauses
  • Secondary markets and internationalization of
    bonds

10
Money markets quoted in London and Paris
Paris (1850) London (1844)
Amsterdam, London, Hamburg, (Berlin), (Augsburg), Frankfort, Madrid, Cadiz, (Bilbao), Lisbon, Oporto, Genoa, Leghorn, Naples, (Venice), Milan, Palermo, Messina, Antwerp, (Basel), Vienna, Trieste, Saint-Petersburg Amsterdam, Rotterdam, Paris/France, Hamburg, Frankfurt, Berlin, Madrid, Bilbao, Cadiz, Barcelona, Oporto, Lisbon, Genoa, Venice, Leghorn, Naples, Palermo, Messina, Antwerp, Vienna, Trieste, Saint.-Petersburg, Rio de Janeiro
11
Liquidity, Liquidity, Liquidity
  • International currencies ability to trade abroad
  • International currencies vast market at issue

12
Key currencies in 1890
13
Dynamics
  • History vs Expectations
  • How to get rid of fixed exchange rate clauses?
    Scandinavia vs the US

14
1880
15
1890
16
1900
17
1910
18
Policy Implications and Conclusions
  • Governance and Institutions? gt Very long run
  • Markets and liquidity? gt Short run
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