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To err is human: US rating agencies and the interwar foreign government debt crisis

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  • FLANDREAU, MARC
  • GAILLARD, NORBERT
  • PACKER, FRANK

Abstract

This article provides a new perspective on the interwar foreign debt crisis by analysing original data on the credit ratings, market yields and subsequent performance of government borrowers in the New York market. We focus on the four agencies that are known to have been operating at the time (Fitch, Moody's, Poor's and Standard Statistics). We provide a description of the rise of the market for grades and gather information on the products sold, price schedules, etc. We find that rating agencies did exhibit features similar to those that have attracted considerable interest recently: namely, they did not react until the crisis had already begun and then implemented massive downgrades. We conclude by suggesting that, given the less than stellar record of the agencies, their emergence in the 1930s as a regulatory tool will have to be explained in future research.

Suggested Citation

  • Flandreau, Marc & Gaillard, Norbert & Packer, Frank, 2011. "To err is human: US rating agencies and the interwar foreign government debt crisis," European Review of Economic History, Cambridge University Press, vol. 15(03), pages 495-538, December.
  • Handle: RePEc:cup:ereveh:v:15:y:2011:i:03:p:495-538_00
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    Cited by:

    1. Olivier Accominotti & Barry Eichengreen, 2016. "The mother of all sudden stops: capital flows and reversals in Europe, 1919–32," Economic History Review, Economic History Society, vol. 69(2), pages 469-492, May.
    2. Flores Zendejas, Juan, 2015. "Capital Markets and Sovereign Defaults: A Historical Perspective," Working Papers unige:73325, University of Geneva, Paul Bairoch Institute of Economic History.
    3. Reinhart, Carmen M. & Trebesch, Christoph, 2014. "A Distant Mirror of Debt, Default, and Relief," Discussion Papers in Economics 21832, University of Munich, Department of Economics.
    4. Marlene Amstad & Frank Packer, 2015. "Sovereign ratings of advanced and emerging economies after the crisis," BIS Quarterly Review, Bank for International Settlements, December.
    5. Bradley, Michael & De Lira Salvatierra, Irving & Gulati, Mitu, 2014. "Lawyers: Gatekeepers of the sovereign debt market?," International Review of Law and Economics, Elsevier, vol. 38(S), pages 150-168.
    6. Carmen M. Reinhart & Christoph Trebesch, 2016. "Sovereign Debt Relief And Its Aftermath," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 215-251, February.

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