Rui Pedro Esteves

Quis Custodiet Quem? Sovereign Debt and Bondholders' Protection Before 1914

The half-century before World War I has been characterized as the first age of financial globalization. This paper focuses on the role and significance of the bondholders` organizations for the governance of this market. I argue that the outcome of these institutions depended on two dimensions: the institutional variation that characterized these organizations and their strategic interaction. These aspects are addressed using a model of sovereign debt with constant renegotiation. An original data set with information on the settlement of defaulted debts in the period 1870-1913 is used to test the implications of the model. Empirical results support the premise that the quality of bondholders` representation matters for the terms of settlement and the costs of renegotiation. Renegotiation-friendly but not debtor-friendly organizations yielded the best ex post results for their members. The representation of bondholders` interests by the issue banks on the other hand, produced inferior outcomes.

A Fantastic Rain of Gold: European Migrants’ Remittances and Balance of Payments Adjustment During the Gold Standard Period

While the pre-1914 mass migrations have been widely studied, the related pattern of emigrants’ remittances is still largely untouched. This paper aims at filling this gap by analyzing the contribution of remittances to financial stability. In the optimum currency area theory labor mobility can ease the adjustment mechanism for countries under fixed exchange rate regimes. We confirm this claim by showing that emigrants’ remittances reduced the incidence of financial disturbances among a sample of emerging economies characterized by substantial emigration. This result underscores the benefits for emerging economies from opening up to international factor flows, despite the associated financial turbulence.

Market Integration in the Golden Periphery. The Lisbon/London Exchange, 1854-1891

Portugal was the first independent nation to follow Britain in joining the gold standard. Although beset by persistent current account deficits and heavily dependent on foreign capital inflows, it enjoyed a relatively stable tenure of 37 years on gold. This paper shows how it was possible to secure currency stability, despite a lower credibility for the peg and a higher incidence of gold point violations than in core countries. The explanation lies in the central role played by institutional actors, such as the Bank of Portugal and/or the government, whose interventions in the exchange market kept the parity within the band.

Remittances, Capital Flows and Financial Development during the Mass Migration Period, 1870-1913

This article addresses the question whether the substantial financial flows received by emigration countries contributed to domestic financial development in peripheral Europe before 1914. We quantify a sizable and significant relation between remittances and measures of financial development that is both larger than the contribution of other international capital flows and the best estimates of the same relation today. Given that financial development is regularly included among the conditions for economic growth and catch-up of developing nations, this article adds to our understanding of the multiple impacts of the mass migration phenomenon on the economies of emigration countries.

The Political Economy of Global Financial Liberalisation in Historical Perspective

This paper is a first attempt to garner the theory and evidence on the political economy of the first wave of financial liberalisation during the nineteenth and early twentieth century, and of its demise after World War I. Not everyone gained from the process of globalisation (of trade, labour, and finance), which brought about important changes in the structure of the economy and the distribution of income in nations across the world. This paper explores how the economic incentives generated by these dislocations translated, through the political system, into choices about openness to foreign capital and financial integration. The period before World War I is remarkable by the almost absence of restrictions on cross-border capital flows, which may explain the little attention it has received in the historical literature, compared to the extensive study of trade protectionism in this period. After the War, many countries experimented with capital controls which varied in nature and intensity and were intensified during the Depression. Despite the attempt made here to reconcile these stylized facts to models of political economy, the analysis requires a better empirical foundation and some suggestions for further research are also proposed.

Big Push or Big Grab? Railways, Government Activism, and Export Growth in Latin America, 1865–1913

Railways were one of the main engines of the Latin American trade boom before 1914. Railway construction often required financial support from local governments, which depended on their fiscal capacity. But since the main government revenues were trade-related, this generated a two-way feedback between government revenues and railways with a potential for multiple equilibria. The empirical tests in this paper support the hypothesis of a positive two-way relationship. The main implication of our analysis is that the build-up of state capacity was a necessary condition for railway expansion and, given the importance of the export sector in these economies, for economic growth and divergence in the region.

Looking ahead from the past: The inter-temporal sustainability of Portuguese finances, 1854 1910

The history of public finances in Portugal from the middle of the nineteenth century to World War I is distinguished by the pursuit of an ambitious programme of public investment in infrastructure, and by the negative financial consequences this elicited, culminating in the 1892 default. In this article we approach the Portuguese financial history of this period with a relatively new methodology for evaluating financial sustainability, which emphasises the inter-temporal nature of government budgeting. The results obtained allow us to quantify the distance that separated Portuguese finances from a sustainable path throughout the period. Although the generational imbalance of Portuguese finances at the time seems massive in the context of todays benchmarks, its economic and financial impact should have been more limited, given the governments relatively low weight in the economy and the favourable demographic pattern.

The First Global Emerging Markets Investor: Foreign & Colonial Investment Trust 1880-1913

The Foreign and Colonial Investment Trust is the oldest surviving closed end fund, having been established in 1868. Its early success and emulation were related to its identification of a missing market – the provision of a wholesale diversified vehicle for the investing public. This paper is a micro-study of this leading investment trust during the First Era of financial globalisation. The history of this flagship fund over more than three decades provides an insight into the relative success of this financial innovation as well as into the risk and returns of investing in emerging markets over a century ago.

Eurobonds Past and Present: A Comparative Review on Debt Mutualization in Europe

Abstract This paper reviews the economic and historical literature on debt mutualization in Europe with reference to pre-1914 guaranteed bonds and the current Eurobonds debate. We argue that, notwithstanding the differences in scale and nature, debt mutualization solutions similar to Eurobonds were tried before, and the closest historical examples to the present debate are the pre-1914 guaranteed bonds. We highlight three key characteristics of debt mutualization, which are apparent both in the current debate and in history: moral hazard, debt dilution and conditionality. We show that the fears about short-run dilution and moral hazard were not unknown to pre-1914 market participants. These problems were partly addressed by mechanisms of conditionality such as international financial control. The historical evidence suggests that the dilution of outstanding obligations may be overplayed in the current debate. On the contrary, creditors’ moral hazard (ignored in current debt mutualization proposals) was as problematic as the usual debtor’s moral hazard –especially when the groups of countries guaranteeing the bonds and the creditor nations did not overlap entirely.

In Search of Lost Time: Foreign Exchange Reserve Management in Portugal between the Wars

In the interwar period central banks accumulated foreign exchange as part of the gold exchange standard recommendations. The problems of credibility of the system, and its later demise, created the need for an active reserve management policy by banks. In this paper we study the repercussion of these international developments in the reserve policy of the Portuguese central bank. Empirical evidence shows that the composition of the reserve by currencies was mainly adjusted to the needs of foreign trade and reflected the choice of peg. The return on the Bank’s portfolio was a minor consideration.