Old Sins: Exchange Rate Clauses and European Foreign Lending in the 19th Century
AbstractThis Paper challenges a popular explanation for ‘original sin’ - the default prone borrowing of long term debt in foreign exchange by emerging markets - that emphasizes the lack of credibility and commitment of governments that prevents them from borrowing in their own currency. Basing our account on the history of emerging market borrowing in the nineteenth century, we offer an explanation based on historical path dependence. We document that almost all IPO’s of governments in foreign markets were in foreign exchange, or with foreign exchange clauses, independent of those countries’ institutional features. We show that a small number of countries could circulate debt denominated in their own currency in secondary markets, again irrespective of their constitutional set-up. We argue that market liquidity can explain both phenomena. Having an internationally circulating currency allows countries to circulate their debt in secondary markets. Going for an IPO in a large financial centre is an attempt to tap the greater liquidity of that centre’s money market and currency. It makes perfect sense to borrow then, in that centre’s currency. The evolution of vehicle currencies and liquid money markets has more to do with historical evolution of trade, going back to medieval times, rather than with institutional reform. Escaping from original sin requires that the country emerge as a leading economic power - a rare historical event, reserved for the US of the nineteenth century and Japan of the twentieth century.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4248.
Date of creation: Feb 2004
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-29 (All new papers)
- NEP-MFD-2004-02-29 (Microfinance)
- NEP-RMG-2004-02-29 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sussman, Nathan & Yafeh, Yishay, 2000.
"Institutions, Reforms, and Country Risk: Lessons from Japanese Government Debt in the Meiji Era,"
The Journal of Economic History,
Cambridge University Press, vol. 60(02), pages 442-467, June.
- Sussman, Nathan & Yafeh, Yishay, 2000. "Institutions, Reforms, and Country Risk: Lessons from Japanese Government Debt in the Meiji Era," The Journal of Economic History, Cambridge University Press, vol. 60(02), pages 442-467, June.
- Bordo, Michael D. & White, Eugene N., 1991. "A Tale of Two Currencies: British and French Finance During the Napoleonic Wars," The Journal of Economic History, Cambridge University Press, vol. 51(02), pages 303-316, June.
- Flandreau, Marc R, 2002. ""Water Seeks a Level": Modeling Bimetallic Exchange Rates and the Bimetallic Band," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 491-519, May.
- Michael D. Bordo & Eugene N. White, 1991. "British and French Finance During the Napoleonic Wars," NBER Working Papers 3517, National Bureau of Economic Research, Inc.
- Neal, Larry, 2000. "How it all began: the monetary and financial architecture of Europe during the first global capital markets, 1648 1815," Financial History Review, Cambridge University Press, vol. 7(02), pages 117-140, October.
- Oppers, Stefan E., 1993.
"The Interest Rate Effect of Dutch Money in Eighteenth-Century Britain,"
The Journal of Economic History,
Cambridge University Press, vol. 53(01), pages 25-43, March.
- Oppers, S.E., 1993. "The Interest Rate Effect of Dutch Money in Eitheenth- Century Britain," Working Papers 329, Research Seminar in International Economics, University of Michigan.
- Flandreau, Marc, 2000. "The economics and politics of monetary unions: a reassessment of the Latin Monetary Union, 1865 71," Financial History Review, Cambridge University Press, vol. 7(01), pages 25-44, April.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.