Rethinking Sovereign Debt from Colonial Empires to Hegemony

Résumé En

During the nineteenth century, free trade and financial integration contributed to what is often referred to as the first globalization wave (1820-1914) (Flandreau, 2013; Flandreau & Zumer, 2004; Mauro et al., 2006). As creditors began to expand the reach of their operations by investing in the bonds of foreign nations, sometime from overseas, lending became more perilous. For instance, British investors often knew little about the Latin American countries whose bonds they were purchasing.¹ Nineteenth-century cross-border lending exemplifies the problem of information asymmetries familiar to economists (Stiglitz, 2000). In this case, uncertainties were compounded by the fact that lenders in the sovereign sector could not mitigate default risk by collateralizing their loans: as a rule, ownership of public assets cannot be transferred to foreigners. To reduce the anxiety of long-distance investing, investors began to seek information pertaining to the trust and credit profile of foreign borrowers. Since investors did not always possess sufficient organizational capabilities and resources to examine the facts, risk analysis was delegated to intermediaries, in particular merchant banks. As informational third parties, merchant banks performed the important function of certifying the credit of debtors, thus providing a practicable solution to the problem of uncertainty in sovereign lending (Flandreau & Flores, 2009). Such banks owned a 'brand' that could grant borrowing states market access on more favourable terms. Gradually, the notion of creditworthiness became cardinal in international lending and borrowing. Technologies of risk assessment played a cardinal role in the building of nineteenth-century debt markets (Carruthers, 2013). The tools of risk analysis which have become so ubiquitous recently can be traced back to the nineteenth ¹ The controversy about Poyais provides a good testimony of how difficult it was for creditors to invest abroad without reliable information to rely on. Poyais, as it turned out, was a fictitious country (Clavel, 2020).