Sovereign Defaults During the Great Depression:
New Data, New Evidence
Andrea Papadia
Economic History Society Annual Conference 2015
University of Wolverhampton, 27 March
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Table of Contents
1
Motivation
2
Contribution
3
Data
4
Empirical Analysis
5
Results summary and discussion
6
Conclusions
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Motivation
Table of Contents
1
Motivation
2
Contribution
3
Data
4
Empirical Analysis
5
Results summary and discussion
6
Conclusions
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Motivation
The interwar debt crisis
Cycles of international lending and default not a new phenomenon at
the time of the Great Depression, but scope was unprecedented
(Winkler, 1933; Eichengreen, 1991)
Default on foreign loans represented the largest bond default item of
the first half of the 1930s in the US (Madden, Nadler, and Sullivan,
1937)
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Motivation
The importance of the interwar debt crisis
The wave of sovereign defaults of the early 1930s was a key event in the
Great Depression
Defaulting countries recovered faster (Eichengreen and Portes, 1990)
German default decisive for the country’s recovery (Ritschl 2002),
contributed to the severity of the economic slump in the United
States through financial channels (Ritschl and Sarferaz 2014), put
pressure on the British financial system speeding up UK’s exit from
the Gold Standard (Accominotti 2012)
For financial channels, the distribution and timing of losses from
defaults, rather than their cumulative amounts, are of central
importance
Compounded impact of all defaults likely to have had large effect on
the American and other creditor economies
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Motivation
The importance of the interwar debt crisis
The defaults contributed to the set-up of post-World War II financial
regulation
Wariness of free capital mobility influenced the institutional set-up of
the Bretton Woods system (Obstfeld and Taylor 1998)
In the US, the crisis was a key justification for the Glass-Steagall Act
of 1933 (Carosso, 1970; Benston, 1990; Flandreau, Gaillard, and
Panizza, 2010)
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Motivation
How much do we know about the causes of the interwar
debt crisis?
“Bad luck” i.e. the onset and severity of the Great Depression as the
key driver of the crisis (Diaz-Alejandro, 1983; Fishlow, 1986;
Flandreau, Gaillard, and Panizza, 2010)
Ample evidence of discrimination between “good” and “bad” borrowers
at the lending stage (Eichengreen, 1989; Eichengreen and Portes, 1990)
Satisfactory rates of return for foreign creditors (Madden, Nadler, and
Sullivan, 1937; Eichengreen and Portes, 1988; Jorgensen and Sachs,
1988)
Prestigious underwriters carefully screened and selected loans → less
malfunctioning in the international financial markets than previously
thought (Flandreau, Gaillard, and Panizza, 2010)
Opportunistic behaviour by lenders, underwriters and borrowers
(Harris, 1935; Lewis, 1938; Lary, 1943)
Both (Eichengreen and Portes, 1986)
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Contribution
Table of Contents
1
Motivation
2
Contribution
3
Data
4
Empirical Analysis
5
Results summary and discussion
6
Conclusions
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Contribution
What the paper does
Presents a new data for over 20 advanced and developing countries
between 1927-1936 (currently being expanded)
Studies the determinants of the incidence and intensity of default for
a sample of 21 countries between 1927-1936
Focuses on dollar-denominated loans due to evidence of
discrimination between different foreign creditors
Investigates separately the determinants of default at the
national-provincial and municipal level
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Data
Table of Contents
1
Motivation
2
Contribution
3
Data
4
Empirical Analysis
5
Results summary and discussion
6
Conclusions
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Data
Data contribution
Prima-facie default size
Public debt data that includes local debt
Public revenue and expenditure at local and central level (and
composition thereof to come soon)
The countries included in the overall data set are:
Argentina, Australia, Austria, Belgium, Bolivia, Brazil, Bulgaria, Canada,
Colombia, Czechoslovakia, Denmark, Finland, France, Germany, Hungary, Ireland,
Italy, Japan, the Netherlands, New Zealand, Norway, Peru, Poland, Sweden,
Switzerland, the United Kingdom and Uruguay
No continuous local debt series for Austria, Bolivia, Czechoslovakia,
France, Hungary, Peru; and no continuous series on local and central
tax for Czechoslovakia, Hungary, Italy, Argentina, Bolivia, Peru,
Uruguay and New Zealand, yet
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Data
The timing and size of the defaults
Share of the principal of dollar bonds in default, 1930-1936
National and Provincial
Year
Austria
Bulgaria
Czechoslovakia
Germany
Hungary
Poland
Argentina
Bolivia
Brazil
Chile
Colombia
Peru
1930
-
-
-
-
-
-
-
-
0.03
-
-
-
Uruguay
-
1931
-
-
-
-
-
-
-
1
0.4
0.78
-
1
-
1932
0.24
1
-
-
0.62
-
0.02
1
1
1
0.53
1
1
1933
0.28
1
-
0.39
1
-
0.2
1
1
1
1
1
1
1934
0.34
1
-
1
1
-
0.26
1
1
1
1
1
1
1935
-
1
-
1
-
-
0.28
1
1
1
1
1
1
1936
-
1
-
1
-
1
0.25
1
1
1
1
1
1
Year
Austria
Bulgaria
Czechoslovakia
Germany
Hungary
Poland
Argentina
Bolivia
Brazil
Chile
Colombia
Peru
Uruguay
1930
-
-
-
-
-
-
-
-
-
-
-
-
-
1931
-
-
-
-
-
-
-
-
0.5
0.14
0.46
-
-
1932
1
-
-
-
1
-
0.6
-
0.83
1
1
1
1
1933
1
-
-
1
1
-
0.67
-
0.75
1
1
1
1
1934
1
-
-
1
1
-
0.82
-
0.77
1
1
1
1
1935
-
-
0.24
1
1
-
0.6
-
0.72
1
1
1
1
1936
-
-
0.23
1
1
-
0.82
-
0.72
1
1
1
1
Municipal
Source: Moody’s Investment Manual (1933, 1934, 1935, 1936, 1937)
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Data
Existing public debt datasets
Reinhart and Rogoff (2009) and Abbas, Belhocine, El Ganainy, and
Horton (2010) recent attempts to reconstruct public debt statistics
over the very long run
For the interwar period, they rely on data collected in a United
Nations volume (United Nations, 1948), which is also the starting
point of my work
Using these data for cross-country analysis very problematic due to
different accounting standards across countries
Data is limited to central government and central government
guaranteed debt
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Data
Average shares of local debt and tax revenues, 1927-1936
Average share of local debt
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Empirical Analysis
Table of Contents
1
Motivation
2
Contribution
3
Data
4
Empirical Analysis
5
Results summary and discussion
6
Conclusions
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Empirical Analysis
Strategy
I test four sets of channels:
1
Did the severity of the Great Depression have an effect on the probability
and size of default? (Eichengreen and Portes, 1986; Diaz-Alejandro, 1983;
Fishlow, 1986; Flandreau, Gaillard, and Panizza, 2010; Tomz and Wright,
2007; Tomz and Wright, 2013)
2
Is default correlated with potential external penalties in trade or future
borrowing? (Cole and Kehoe, 1998; Fuentes and Saravia, 2010; Martinez
and Sandleris, 2011; Cruces and Trebesch 2013)
3
Did domestic economic and political circumstances influence the incidence
of external defaults? (Mathias and O’Brien, 1976; Besley and Persson, 2009;
O’Brien, 2011; Erce 2012)
4
Did the fiscal and monetary policies (narrowly defined) enacted have any
traction in affecting the default outcome? (Eichengreen and Portes, 1986,
1990; Felix, 1987)
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Empirical Analysis
Estimator: Arellano-Bond GMM
1
Panel data method which allows for dynamics i.e. persistence of
default
2
Model estimated in first differences, but retrieves the effect of levels
3
Allows for country and year fixed effects
4
Minimizes issues of cross-country comparability of the data
5
Instruments dependent variables with further lags of the same
variables
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(1)
(2)
(3)
(4)
(5)
(6)
0.690***
0.688***
0.702***
0.737***
0.733***
0.748***
(0.0817)
(0.0825)
(0.0801)
(0.0771)
(0.0757)
(0.146)
-0.768
-1.366**
-1.427**
-0.463
(0.712)
(0.554)
(0.567)
(0.609)
defaultsize
L.defaultsize
L.total debt/GDP
-0.194***
-0.133
(0.0708)
L.central gov debt/GDP
(0.0945)
-0.218**
(0.0964)
L.central fiscal capacity
L.local gov debt/GDP
0.00114
(0.265)
L.foreign debt/total debt
L.short term debt/total debt
L.trade/trade 1929
L.%change in deficit w/r 1929
L.GDP change over 1929
-0.550
-0.576
-0.442
(0.415)
(0.440)
(0.402)
0.422**
0.403**
0.421**
0.405
0.450*
0.519*
(0.165)
(0.178)
(0.177)
(0.277)
(0.251)
(0.295)
0.0191***
0.0189***
0.0198***
0.0130*
0.0119*
(0.00613)
(0.00680)
(0.00602)
(0.00722)
(0.00709)
(0.0114)
0.000131
0.000146
0.000158
0.000619
0.000504
-0.000258
(0.000566)
(0.000580)
(0.000561)
(0.000496)
(0.000516)
(0.001000)
-0.658***
-0.582**
-0.668***
-0.523*
(0.238)
(0.250)
(0.251)
(0.270)
L.total $ debt/GDP
0.0234**
-0.732**
-0.153
(0.287)
(0.329)
-1.085***
(0.419)
L.local fiscal capacity
-0.619
(0.776)
Constant
0.885**
0.843**
0.852**
0.508
0.821**
0.0388
(0.354)
(0.345)
(0.362)
(0.337)
(0.394)
(0.521)
Observations
154
153
153
165
158
103
Number of countries
21
21
21
21
20
17
Robust standard errors in parentheses. Time fixed-effects included in all specifications.
*** p<0.01, ** p<0.05, * p<0.1
Determinants of aggregate defaults
Statistically insignificant controls not shown: L.ongold, L.bankingcrisis, L.polity, L.trade/GDP
(1)
(2)
(3)
(4)
(5)
(6)
0.701***
0.697***
0.712***
0.752***
0.746***
0.770***
(0.0789)
(0.0792)
(0.0766)
(0.0650)
(0.0665)
(0.132)
-0.473
-1.191**
-1.314**
-0.659
(0.671)
(0.515)
(0.529)
(0.559)
defaultsize national-provincial
L.defaultsizenatprov
L.total debt/GDP
-0.203**
-0.168*
(0.0793)
L.central gov debt/GDP
(0.0962)
-0.240**
(0.101)
L.central fiscal capacity
L.local gov debt/GDP
0.0433
(0.277)
L.foreign debt/total debt
L.short term debt/total debt
L.trade/trade 1929
L.%change in deficit w/r 1929
L.GDP change over 1929
-0.527
-0.572
-0.428
(0.430)
(0.458)
(0.411)
0.443**
0.418*
0.451**
0.437
0.445
0.616*
(0.212)
(0.221)
(0.220)
(0.300)
(0.295)
(0.349)
0.0196***
0.0196***
0.0204***
0.0127
0.0113
0.0241**
(0.00661)
(0.00714)
(0.00643)
(0.00775)
(0.00776)
0.000190
0.000175
0.000173
0.000634
0.000611
0.000446
(0.000548)
(0.000570)
(0.000554)
(0.000483)
(0.000495)
(0.000842)
-0.717***
-0.630**
-0.725***
-0.518*
(0.244)
(0.255)
(0.252)
(0.278)
L.total $ debt/GDP
(0.0120)
-0.816***
-0.180
(0.308)
(0.365)
-1.209***
(0.453)
L.local fiscal capacity
-0.371
(0.692)
Constant
0.945***
0.907**
0.907**
0.511
0.976**
0.0376
(0.367)
(0.357)
(0.371)
(0.356)
(0.453)
(0.592)
Observations
154
153
153
165
158
103
Number of countries
21
21
21
21
20
17
Robust standard errors in parentheses. Time fixed-effects included in all specifications.
*** p<0.01, ** p<0.05, * p<0.1
Determinants of national-provincial defaults
Statistically insignificant controls not shown: L.ongold, L.bankingcrisis, L.polity, L.trade/GDP
(1)
(2)
(3)
(4)
(5)
(6)
0.791***
0.781***
0.884***
0.723***
0.709***
0.865***
(0.0607)
(0.0640)
(0.0505)
(0.117)
(0.0775)
(0.0468)
defaultsize municipal
L.defaultsizemun
L.central gov debt/GDP
L.local gov debt/GDP
-0.285*
-0.0992
(0.152)
(0.0794)
0.0739
0.0967
(0.180)
(0.186)
0.299
0.245
0.910*
(0.329)
(0.338)
(0.471)
L.central fiscal capacity
-1.084*
(0.577)
L.foreign debt/total debt
L.short term debt/total debt
L.polity score
L.trade/trade 1929
L.GDP change over 1929
L.total debt/GDP
0.337
0.317
0.624***
0.154
0.130
0.194
(0.218)
(0.213)
(0.209)
(0.288)
(0.183)
(0.275)
0.00665
0.00705
0.0187***
0.00878
0.00127
0.0149***
(0.00695)
(0.00699)
(0.00505)
(0.00900)
(0.00739)
(0.00434)
0.00463
0.00479
0.0165**
-0.00213
-0.00500
0.00368
(0.00545)
(0.00501)
(0.00702)
(0.00941)
(0.00526)
(0.00773)
-0.638***
-0.578***
-0.409*
-0.565*
-0.489**
-0.898*
(0.218)
(0.214)
(0.232)
(0.329)
(0.216)
(0.488)
-0.210*
(0.116)
L.local fiscal capacity
-0.657
-0.409
-0.351
(0.620)
(0.450)
(0.535)
L.total $ debt/GDP
-0.785
(0.564)
Constant
Observations
Number of countries
0.363
0.438
-0.0895
0.645
0.467*
1.034
(0.242)
(0.289)
(0.286)
(0.447)
(0.250)
(0.634)
154
153
96
103
165
101
21
21
17
17
21
17
Robust standard errors in parentheses. Time fixed-effects included in all specifications.
*** p<0.01, ** p<0.05, * p<0.1
Determinants of Municipal defaults
Statistically insignificant controls not shown: L.ongold, L.bankingcrisis, L.trade/GDP, L.%change in deficit w/r 1929
Results summary and discussion
Table of Contents
1
Motivation
2
Contribution
3
Data
4
Empirical Analysis
5
Results summary and discussion
6
Conclusions
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Results summary and discussion
Countries that relied more on short-term debt were more
likely to default
Average share of short-term debt over total debt, 1927-1936. Unweighted average. Defaulters: Bulgaria, Czechoslovakia,
Germany, Greece, Poland, Argentina, Bolivia, Brazil, Colombia, Peru. Non defaulters: Belgium, Denmark, Finland, United
Kingdom, Ireland, Netherlands, Norway, Switzerland, Venezuela, Japan, Canada, New Zealand
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Results summary and discussion
Reliance on dollar loans discouraged countries from
defaulting on dollar bonds
Consistent with
Traditional reputation-based models of default
Reputational spillovers (Cole and Kehoe, 1998), in this case from
public to private sector
Governments including the private sector’s reliance on foreign finance
in the calculus on the default decision (Erce 2012)
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Results summary and discussion
Default, debt-to-GDP ratio and fiscal capacity
Countries with a higher debt-to-GDP ratio were less likely to default
Countries with more fiscal capacity were able to borrow more and
were also less likely to default
Fiscal capacity exhibits a lot of time variation → is it due to the
composition of revenues?
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Results summary and discussion
Central fiscal capacity and central public debt, 1927-1936
Data does not cover the 1927-1936 range for all countries.
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Results summary and discussion
State revenue over GDP, 1927-1936
Unweighted average. Defaulters: Bulgaria, Germany, Poland, Argentina, Brazil, Colombia. Non defaulters: Belgium, Denmark,
Finland, France, United Kingdom, Italy, Netherlands, Norway, Sweden, Switzerland, Australia, Japan, Canada, New Zealand.
Long-run fiscal capacity
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Results summary and discussion
State revenue over GDP, 4 years to default=1
The role of trade
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Results summary and discussion
Municipal defaults driven principally by the economic slump
Sub-national debt as a contingent-claim?
Tax revenue composition of local governments for the interwar period
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Conclusions
Table of Contents
1
Motivation
2
Contribution
3
Data
4
Empirical Analysis
5
Results summary and discussion
6
Conclusions
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Conclusions
Takeaways
Short-term debt played an important role in the interwar debt crisis
Countries might refrain from defaulting on their foreign creditor if
they depend on them for a significant share of their public and private
sector finance
The ability to raise taxes and its change over time were a key
determinant of the ability to borrow and the risk of default, as the
literature on state/fiscal capacity would suggest
Both common shocks and specific country characteristics played a
role in the default process
Determinants of default reflect political interactions and rule out
default as a mechanical and automatic response to exogenous shocks
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Conclusions
Thank you!
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default size
foreign debt/GDP
OLS
OLS
Tobit(MLE)
Tobit(MLE)
0.630**
(0.196)
0.912**
0.884*
1.218**
(0.146)
(0.334)
(0.261)
lagged 1931 trade/trade 1929
-0.0884
-0.0230
(0.251)
(0.487)
1928 trade/GDP
-2.518**
-3.200**
(0.491)
% change in deficit 1929-31
South America
Australia
(0.739)
0.0121
0.0137
0.0161
0.0200
(0.0151)
(0.0158)
(0.0174)
(0.0173)
0.463**
0.418**
0.616*
0.554*
(0.139)
(0.153)
(0.229)
(0.236)
-0.699**
-0.959**
-0.914**
-1.259**
(0.0986)
(0.126)
(0.186)
(0.247)
lagged trade/trade 1929
1.176**
1.635**
(0.353)
(0.498)
lagged trade/GDP
-3.589**
-4.640**
(0.602)
Constant
Observations
R-squared
(1.040)
1.080**
0.275
1.294*
0.266
(0.336)
(0.296)
(0.515)
(0.361)
41
41
41
41
0.652
0.658
Robust standard errors in parentheses
** p<0.01, * p<0.05
Replicating Eichengreen and Portes (1986). Controls not shown: % change in reserve ratio 1929-31
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Average shares of central and local debt over total debt,
1927-1936
Unweighted average. Countries: Belgium, Bulgaria, Denmark, Finland, Germany, United Kingdom, Ireland, Italy, Netherlands,
Norway, Poland, Sweden, Switzerland, Argentina, Brazil, Colombia, Uruguay, Australia, Japan, Canada, New Zealand. Back to
Local debt
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Main sources
United Nations - Public Debt 1914-1946
Yearbooks of the German Statistical Office
Statistical Handbook of the World Economy (Statistiches Handbuch
der Weltwirtschaft)
The Institute for International Finance
The Corporation of Foreign Bondholders
Moody’s Investment Manuals
League of Nations Statistical Yearbooks
Cleona Lewis (1937) - America’s Stake in International Investment
Back to
Local debt
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Total fiscal capacity and total public debt, 1927-1936
Data does not cover the 1927-1936 range for all countries. Back to
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Fiscal capacity
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The aggregate evidence on fiscal capacity
Source: Besley and Persson (2014) Unweighted average. Argentina, Australia, Brazil, Canada, Chile, Colombia, Denmark,
Finland, Ireland, Japan, Mexico, the Netherlands, New Zealand, Norway, Sweden, Switzerland, UK, US. Back to
Fiscal capacity
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The role of trade
Did countries risking default attempt to boost trade in order to
generate foreign exchange revenues?
Is the real action in bilateral trade?
Back to
Fiscal capacity and default
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