Crying on lombard street: Fixing sovereign defaults in the 1890s

  • Flores J
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Abstract

The wave of sovereign defaults in the 1890s was one of the worst ever experienced in the history of finance. From Argentina in 1890 to Brazil in 1898, countries in Latin America and Southern Europe defaulted on their external debt, resulting in huge losses for investors. However, this was the last series of defaults in the gold standard era. At the beginning of the 20th century and until the outbreak of World War I, defaults were less frequent despite the continuous increase in foreign government borrowing. The literature has provided several explanations for this apparent success, all of which point to improvements introduced in the market. This paper argues that the fall in the number of defaults is actually related to a more favourable world macroeconomic environment and to the increased liquidity available in international financial markets rather than to an abrupt shift in the manner in which defaults were handled. I show that settlements were more correlated with the relative ease in reaccessing foreign capital markets than to changes in the financial architecture

Author-supplied keywords

  • capital markets
  • financial intermediaries
  • sovereign defaults

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Authors

  • Juan H. Flores

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