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Public borrowing in harsh times: The Leagues of Nations loans revisited

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  • Yann Decorzant
  • Juan Flores

Abstract

This paper reassesses the importance of the League of Nations loans of the 1920s. These long-term loans were an essential part of the League’s strategy to restore the productive basis of countries in Central and Eastern Europe. Whereas the literature is not conclusive as to the final result of this experience, we argue that the League Loans were successful because they accomplished the task for which they were conceived – namely, to allow countries in financial distress to access capital markets. This success rested on the sustained efforts of the League of Nations to gather support from creditor countries’ governments and financial intermediaries, as well as its efforts to develop plans for economic reform for borrowing countries. We provide quantitative and qualitative evidence to show that the League provided market access in a difficult and hostile environment, and did so by building its own reputation as an actor that provided a credible commitment to economic and institutional reforms. Through the success of the placement of the initial issues, the League became capable of influencing borrowing costs, even if they continued to be predominately determined by the secondary market and remained high as a result of the risk involved. Much of the confusion in the literature is explained by the fact that the League lacked its own capital, which impeded its ability to act as a lender of last resort once the great depression hit Europe.

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Bibliographic Info

Paper provided by Département des Sciences Économiques, Université de Genève in its series Research Papers by the Department of Economics, University of Geneva with number 12091.

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Length: 38 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:gen:geneem:12091

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Keywords: League Loans; Great Depression; capital markets; underwriting;

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  1. Flores, Juan H., 2011. "Information asymmetries and conflict of interest during the Baring crisis, 1880–1890," Financial History Review, Cambridge University Press, vol. 18(02), pages 191-215, August.
  2. Oosterlinck, Kim & Ureche-Rangau, Loredana, 2012. "Interwar Romanian sovereign bonds: the impact of diplomacy, politics and the economy," Financial History Review, Cambridge University Press, vol. 19(02), pages 219-244, August.
  3. Broadberry,Stephen & O'Rourke,Kevin H., 2010. "The Cambridge Economic History of Modern Europe," Cambridge Books, Cambridge University Press, number 9780521708388, December.
  4. Flandreau, Marc & Flores, Juan H., 2009. "Bonds and Brands: Foundations of Sovereign Debt Markets, 1820–1830," The Journal of Economic History, Cambridge University Press, vol. 69(03), pages 646-684, September.
  5. Flandreau, Marc & Gaillard, Norbert & Panizza, Ugo, 2010. "Conflicts of Interest, Reputation, and the Interwar Debt Crisis: Banksters or Bad Luck?," CEPR Discussion Papers 7705, C.E.P.R. Discussion Papers.
  6. Kindleberger, Charles P., 1993. "A Financial History of Western Europe," OUP Catalogue, Oxford University Press, edition 2, number 9780195077384.
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