0199272697.Oxford.University.Press.USA.Emerging.Markets.and.Financial.Globalization.Sovereign.Bond.Spreads.in.1870-1913.and.Today.Jun.2006.pdf

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Emerging Markets and

Financial Globalization

Sovereign Bond Spreads in

1870–1913 and today

Paolo Mauro, Nathan Sussman, and Yishay Yafeh

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Great Clarendon Street, Oxford OX2 6DP

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First published 2006

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Preface

This book is the outcome of our long-time fascination with what

Stefan Zweig called the World of Yesterday , a world in which people,

capital, and goods could move freely from Europe to far corners of the

world: “Before 1914, the earth had belonged to all. People went where

they wished and stayed as long as they pleased. There were no per-

mits, no visas, and ...frontiers were nothing but symbolic lines”

(1943 English edition, p. 311). This period of globalization, which

reached a peak between the mid-nineteenth century and the outbreak

of the First World War, provides a rare opportunity to look at the glob-

alization we are experiencing today in a historical mirror. What fea-

tures remain the same? What has changed? And what explains the

differences? The present study focuses on ﬁnancial globalization and

international capital ﬂows, and attempts to provide some answers to

these questions.

We have made an effort to make the book appealing and accessible

to a wide audience, consisting of both academics and others, avoiding

excessively technical discussions. Economic historians will hopefully

be interested in the discussion of international capital ﬂows in

1870–1913, and in the analysis of the economic institutions of the

time. Other economists might be more interested in the comparative

analysis of the determinants of borrowing costs for emerging markets

before the First World War and today, as well as in the study of mecha-

nisms whereby investors sought to mitigate the consequences of the

debt crises of the past. All of these issues are of major importance for

academic research in international macroeconomics. We also believe

that there are important lessons from the past for policy makers in

governments and international organizations, and that the long-run

perspective we offer will be interesting and useful for investors focus-

ing on emerging markets.

In the spirit of globalization, work on this book was carried out in

numerous institutions in different countries: the Hebrew University

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Preface

of Jerusalem (Sussman and Yafeh), Université de Montreal (Yafeh),

and the International Monetary Fund. We are grateful to the

Guildhall Library in London for access and assistance in research on

the Annual Reports and documents of the Corporation of Foreign

Bondholders; to the National Library (Jerusalem, Israel) for access to

microﬁlmed copies of the London Times for the historical period; and

to the London Stock Exchange Project at Yale University for electronic

access to the Investors’ Monthly Manual .

The collection of historical ﬁnancial data is no easy task. We would

not have been able to undertake the research for this book without the

invaluable help of many talented students and research assistants:

Alexandre Dubé, Guy Green, Avital Gutalevich, Yosh Halberstam,

Shai Harel, Priyadarshani Joshi, Priyanka Malhotra, Martin Minnoni,

Tamar Nyska, Erran Oren, Omer Schwartz, Hadas Yoked, and Shalva

Zonenshvili. The construction of the data set and the completion of

this research project would not have been possible without the gener-

ous ﬁnancial support of the Israel Science Foundation (Sussman and

Yafeh, Grant No. 871/02).

Our friends and colleagues around the world have also contributed

many helpful comments and suggestions. We are especially grateful to

Barry Eichengreen, Niall Ferguson, Eugene Kandel, Kobi Metzer,

Richard Portes, Raghuram Rajan, Zvi Sussman, Alan Taylor, Jeff

Williamson, Zvi Wiener, Jeromin Zettelmeyer, and participants in the

2003 meeting of the American Economic Association and seminars at

the International Monetary Fund, the New York Fed, the World Bank,

Brown University, Harvard University, Hitotsubashi University,

Queen’s University, Rutgers University, Stanford University, Tel Aviv

University, and the University of Toronto.

Finally, the views expressed in the book are those of the authors and

do not necessarily represent the views of the International Monetary

Fund or its policies.

Paolo Mauro (International Monetary Fund)

Nathan Sussman (The Hebrew University of Jerusalem)

Yishay Yafeh (The Hebrew University of Jerusalem and CEPR)

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Contents

List of Figures

viii

List of Tables

1. International Capital Flows in the Previous Era of

Globalization: An Overview and Outline of the Book

and its Objectives

2. The London Market for Sovereign Debt, 1870–1913 versus

Today’s Markets

3. The Determinants of the Cost of Capital:

Case Study Evidence

4. News and Sharp Changes in Bond Spreads

5. Spreads, News, and Macroeconomics: A Multivariate

Regression Analysis

6. Co-movement of Spreads: Fundamentals or

Investor Behavior?

108

7. Sovereign Defaults and the Corporation of

Foreign Bondholders

128

8. A Few Lessons for the Future

163

Appendix 1. Emerging Market Bonds and Spreads, 1870–1913

167

Appendix 2. Macroeconomic Data Sources, 1870–1913

172

References

174

Index

000

vii

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