Coping with Global Debt Crises: Debt Settlements, 1820 to 1986

Literature › Works

Christian Suter; Hanspeter Stamm (1992). Coping with Global Debt Crises: Debt Settlements, 1820 to 1986. Comparative Studies in Society and History, Vol. 34, No. 4. Cambridge University Press.

Type	journal article
Scope	Comparative and methods
Method	descriptive quantitative
Period studied	1820–1986
Regions	Global periphery, Latin America, Europe, United States
Themes	comparative theory, macro fiscal finance debt, methods data sources
Citation key	suter1992

Argument

The article compares debt settlements across three pre-WWII bond default crises and the post-war multilateral rescheduling regime. It argues that the actor structure on the creditors' side, meaning the strength of creditor cooperation, shapes the speed of crisis management, creditor influence over debtors and the amount of debt relief. Dispersed bondholders produced slow settlements, generous relief and little direct control, while concentrated creditor clubs (the Paris Club, bank committees, the IMF) produced fast, provisional, hard-term reschedulings with indirect pressure. World-leadership (hegemonic) cycles are used to explain differences between the earlier periods. The authors conclude that debt release elements must be strengthened in future settlements. South Africa is not discussed.

Evidence and method

A dataset of about 120 bond default settlements 1820-1975, drawn from the annual reports of the British Council of Foreign Bondholders (1873-1985), French and Belgian bondholder association reports and The Economist. For 226 post-war reschedulings (1956-86) it uses IMF, World Bank and OECD sources and the financial press. Analysis is by descriptive statistics, one-way ANOVA and Scheffé tests.

Findings

• Bond defaults were settled only slowly, on average after about nine years. (p. 9)

  show an average duration of defaults on foreign bonds of nine years, that is, an average of nine years passed after default before debtor countries reached a final settlement

• Settlements were durable: about 21 years passed before the same country defaulted or rescheduled again. (p. 12)

  on the average, after a debt settlement, twenty- one years elapse before the same country defaults once again or negotiates a rescheduling arrangement.

• Creditor political or economic control over debtors in bond settlements was rare and concentrated in 1871-1925. (p. 13)

  It can be demonstrated for only 20 out of 113

• Creditors wrote off a substantial share of interest arrears, and relief grew in the 1930s settlements. (p. 14)

  From 1821 to 1975 the arrears were converted at a rate of 67 percent into new bonds. Hence, bondholders wrote off an average 33 percent of arrears

• The post-war rescheduling regime was large-scale and dominated by banks and the Paris Club. (p. 19)

  the 226 rescheduling agreements concluded involved 52 countries and covered credits worth roughly $275 billion between

• Reschedulings were repeated and provisional rather than true settlements. (p. 21)

  between 1976 and 1986 a total of forty-eight coun- tries had to reschedule their external debt, but thirty-eight of them met more than once with their creditors.

• Creditors exerted indirect pressure via the IMF, with most reschedulings tied to adjustment programmes. (p. 21)

  77 percent of all reschedulings con- cluded until the end of 1986 were accompanied by IMF adjustment programs.

• Early-1980s reschedulings were on hard, essentially commercial terms with little long-term relief. (p. 23)

  reschedulings have largely been con- cluded on commercial terms involving only small long-term debt relief.

• Bond-default settlements gave far larger relief than 1980s reschedulings, with about half of debts liquidated after the 1930s crisis. (p. 25)

  As much as an estimated 50 percent of outstanding debts (including arrears of interest) was liquidated through the debt settlements in the crisis of the 1930s.

• The Brady Plan's Mexican test case delivered limited relief compared with historical default settlements. (p. 30)

  the degree of debt release granted to Mexico by the Brady Plan rescheduling has to be judged as rather low.