Settling Defaults in the Era of Bond Finance

Abstract

Comparisons of the debt crises of the 1930s and 1980s emphasize the greater incidence of default and the greater ease of restructuring half a century ago. The difficulty developing-country debtors have had in putting the current crisis behind them, it is argued, is due to the more systematic involvement of creditor-country governments and intergovernment agencies. This article reviews the negotiating strategies of the debtors and creditors of the 1930s, the terms of settlement, and the realized rates of return on U.S. and U.K. foreign bonds. It shows that rather than being sharp and complete, default in the 1930s was often partial and intermittent. Uncertainty about debt, trade, and export credits lingered on. Often many years passed before final settlements were achieved. Creditor-country governments were intimately involved in the settlement process, although their influence was not always to the benefit of the bondholders.

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