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Dealing With Debt: The 1930s and the 1980s

Listed author(s):
  • Barry Eichengreen
  • Richard Portes

This paper analyzes the sovereign defaults of the 1930s and their implications for the debt crisis of the 1980s. It reports nine major findings. There is little evidence that financial markets have grown more sophisticated' over time, or that banks have a comparative advantage over the bond market in processing information. (2) Debt default in the 1930s depended on a combination of factors,. including the magnitude of the external shocks, the level of debt, and: the: economic policy response , as well as on a range, of: noneconomic considerations. (3) Countries which interrupted service recovered more quickly from the Great Depression than countries which resisted default. This contrasts with the experience of the 1980s, when no clearcut relationship exists (4) There is little evidence that countries which defaulted in the 19305 suffered inferior capital market access subsequently. (S} The readjustment of defaulted debts was protracted: the analogy with Chapter 11 corporate bankruptcy proceedings is no more applicable to the 1930s than to the 1980s. (6) Although default led in some cases to a substantial reduction of transfers from debtors to creditors, on balance returns on sovereign loans compared favorably with returns on domestic investments. (7) Creditor-country governments did more in the 'thirties than in the 'eighties to accelerate the settlement process. (3) Global schemes analogous to the Baker Plan were widely proposed but never implemented. (9) In contrast, market-based debt reduction in the form G debt buybacks played a useful role in the resolution of the crisis.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2867.

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Date of creation: Feb 1989
Publication status: published as Dealing with the Debt Crisis, edited by Ishrat Husain and Ishac Diwan, pp. 69-86. Washington, DC: The World Bank, 1989.
Handle: RePEc:nbr:nberwo:2867
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  1. Fishlow, Albert, 1985. "Lessons from the past: capital markets during the 19th century and the interwar period," International Organization, Cambridge University Press, vol. 39(03), pages 383-439, June.
  2. Sule Ozler, 1988. "Evolution of Commerical Bank Lending to Developing Countries," UCLA Economics Working Papers 497, UCLA Department of Economics.
  3. Barry Eichengreen and Richard Portes., 1988. "Settling Defaults in the Era of Bond Finance," Economics Working Papers 8885, University of California at Berkeley.
  4. Stanley Fischer, 1987. "Resolving the International Debt Crisis," NBER Working Papers 2373, National Bureau of Economic Research, Inc.
  5. Eichengreen, Barry & Portes, Richard, 1986. "The Anatomy of Financial Crises," CEPR Discussion Papers 130, C.E.P.R. Discussion Papers.
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