Much of the past historical research on sovereign debt markets has focused mainly on their primary market functions, in particular how access to markets or sovereign defaults are determined. A new book by economists Paulo Mauro, Nathan Sussman and Yishay Yafeh is a first serious attempt to explore and analyse the secondary markets in sovereign debt. The authors do this by comparing two large markets in history where such loans were traded. The first one is the large London bond market in 1870–1913 – the first era of globalisation – where bonds from all over the world were actively traded. The other one is the more recent international market for Brady bonds issued mostly by Latin American countries and traded since the early 1990s.
Comparing spreads from these remote markets naturally conveys a number of data-related and methodological problems. For example, bonds in the early period were mostly consols (i.e. eternal loans) while the Brady bonds matured after only about 10–15 years. The calculation of bond yields also differed, being current yields in the past and ‘stripped’ yields of Brady bonds. It is unclear to what extent these and other problems might influence some of the book's basic messages. However, the analyses are mostly based on very large shifts in spreads and their correspondence with other variables which suggests that they are quite robust to most variations in data or method.
A few words should also be said about the impressive historical database that underlies the findings of the study. Using sources such as Investors Monthly Manual, the London Times and various archives, it comprises high-frequency secondary market yields, matching primary market information and a detailed news article database with nearly 2,500 articles indexed by topic and country. Needless to say, this empirical achievement in itself stands out as one of the book's major contributions.
What then are the major findings of this book? In three of the book's five analytical chapters, the authors examine what drives emerging market spread changes by linking them with news events in the media. Specifically, by classifying news in different categories such as ‘wars’, ‘bad economic’, ‘reform’, ‘debt related’, etc, a very precise picture of the kind of information that influences the spreads at each point in time is given. Whether news of wars is equivalent to actual wars in terms of their impact on spreads, however, remains to be shown in future studies. Panel data regressions are then used to show that wars and instability had a much larger impact on spreads than did other types of news, especially news about institutional reforms. Perhaps this is not so surprising considering that many reforms are implemented so as to be effective over longer time spans, but it is nevertheless a timely reminder for policymakers working on, e.g., debt relief issues. Furthermore, the overall impact of news on spreads has also diminished notably over time. Coupled with another finding that co-movements of spreads have increased over time, this suggests, rather alarmingly, that international bond markets have become more contagious in the recent period.
At the end of the book, there is a fascinating in-depth study of how sovereign debt restructurings were conducted before World War I. By examining the archives of the most influential international creditor associations of this time, the Corporation of Foreign Bondholders (CFB), the authors provide several examples of creditor activism in times of a threatening sovereign default. However, the CFB's overall experiences were mostly negative and such an organisation would probably function even worse in today's much more dispersed international financial community.
Altogether, this book is an impressive empirical achievement in providing new statistical evidence and several insightful analyses on emerging market spreads in the past and today. It is highly recommendable to all with an interest in financial history as well as the evolution of sovereign debt markets.
