Lending resumption after default : lessons from capital markets during the 19th century / prepared by Juan Solé
This paper mines the experience of capital markets during the 19th century to propose an alternative way of interpreting international default episodes. The standard view is that defaulting on sovereign debt entails exclusion from capital markets. Yet we have observed multiple instances of sovereign...
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| Online Access: |
Full Text (via ProQuest) |
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| Main Author: | |
| Format: | eBook |
| Language: | English |
| Published: |
[Washington, D.C.] :
International Monetary Fund,
©2006.
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| Series: | IMF working paper (Online) ;
WP/06/176. |
| Subjects: |
| Summary: | This paper mines the experience of capital markets during the 19th century to propose an alternative way of interpreting international default episodes. The standard view is that defaulting on sovereign debt entails exclusion from capital markets. Yet we have observed multiple instances of sovereign debt default in which the reaction of lenders was not the one predicted by the punishment story: in some cases, lending ceased for long periods, but in others it was not interrupted. This paper claims that the reaction of lenders after default stems from the additional knowledge about the borrower that lenders acquire during these episodes. The lending relationship is modeled in a costly state-verification environment in which governments have private information about their investment projects (good or bad). It is shown that, in the event of default, it is worthwhile for lenders to find out more about the type of project, and then interrupt lending only if the project is believed to be a bad one. |
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| Physical Description: | 1 online resource (26 pages) |
| Bibliography: | Includes bibliographical references. |
| ISBN: | 1282447289 9781282447288 9781451987171 145198717X |
| Source of Description, Etc. Note: | Source of description: Print version record. |