Foreign bonds, territorial change and repudiation: The Silesian Bonds saga

Once a famous tale of conquest, law and foreign bond markets, the saga of the Silesian Bonds of 1734-37 is missing from the literature on sovereign debt. The Silesian Bonds were among the earliest foreign currency sovereign bonds issued. They go into the market 84 years prior to the 1818 Prussian issue by the Rothschilds sometimes described as the first Eurobond. The bonds were issued by Charles VI, Holy Roman Emperor of the House of Habsburg, to investors in London and Amsterdam. They were tradable, denominated in foreign currency, and secured by a pledge of revenues from the estates of Silesia. Although bondholders seemed well-protected by a variety of covenants promising that the sovereign would refrain from raising defenses, there was reluctance to pay, delay, and ultimately partial repudiation. The story we tell centers around what happened to the debts after Frederick II of Prussia seized much of Silesia in 1740-42, agreed in the 1742 Peace of Berlin to take over from Austria the liability of the Silesian bonds, but then decided that he did not wish to pay. From the story, we draw clues about the state of international law, contracting practices, and the operation of the sovereign debt market in the mid 18th and early 19th centuries in Europe.