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Caveat Emptor: Coping With Sovereign Risk Without the Multilaterals

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  • Flandreau, Marc

Abstract

This paper studies how private banks dealt with sovereign risk before World War I. At that time there was no multilateral institution to bail out borrowers in default and sovereign rating had not yet developed. All the burden of information collection and processing was borne out by individual banks. We focus on the experience of Crédit Lyonnais, which grew over the period into the largest international bank in a country that was the second largest world creditor. In 1871, Crédit Lyonnais set up a Service d'Etudes Financières (SEF), a research department whose aim was to study borrowing countries. The lending spree of the late 1880s, and the bust which ensued, provided the impetus for a massive expansion of SEF, which then developed techniques to analyse sovereign risks. We argue that these methods are an essential aspect of the market mechanism as it operated before World War I: given the prominence of Crédit Lyonnais on the international scene, its perceptions influenced the size and direction of capital flows.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2004.

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Date of creation: Oct 1998
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Handle: RePEc:cpr:ceprdp:2004

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Keywords: private sector risk models; rating; Sovereign Risk;

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  1. repec:spo:wpecon:info:hdl:2441/648 is not listed on IDEAS
  2. Flandreau, Marc & Le Cacheux, Jacques & Zumer, Frédéric, 1998. "Stability Without a Pact? Lessons from the European Gold Standard 1880-1914," CEPR Discussion Papers 1872, C.E.P.R. Discussion Papers.
  3. Marc Flandreau, 1997. "Central Bank Co-operation in Historical Perspective: a Sceptical View," Sciences Po publications info:hdl:2441/648, Sciences Po.
  4. Ludger Schuknecht & Vito Tanzi, 1995. "The Growth of Government and the Reform of the State in Industrial Countries," IMF Working Papers 95/130, International Monetary Fund.
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