NICEP Seminar - rethinking sovereign default in the interwar period - David Gill / Markus Eberhardt (Nottingham)

David Gill and Markus Eberhardt (Nottingham) will deliver a talk for NICEP titled 'Rethinking sovereign default in the interwar period' (abstract below).

Abstract

Scholars offer two competing explanations for why states repay their debts to foreign lenders. Political scientists such as Michael Tomz claim that governments believe a reputation for defaulting would increase the costs of borrowing from international capital markets. Economists, including Jeremy Bulow and Kenneth Rogoff, argue that states fear direct sanctions or nonfinancial penalties.

The first part of our paper tests these competing claims using a case study approach focused on the United Kingdom in the interwar period. We find that British repayment of its war debts, which began in 1919 and ended in 1934, sits uncomfortably in either explanation. Archival data provide no evidence that the United Kingdom was deterred by direct reprisals for non-payment. Nor did the British government appear seriously worried about reputational damage in terms of future borrowing. Instead we reveal two other factors driving British behaviour away from default in both good and bad times.

The first was a fear that states owing money to United Kingdom might use its default on war loans as an excuse to cease repayment on other outstanding debts. The second was domestic-political in nature. Despite a significant majority in the House of Commons, some cabinet ministers believed that refusal to pay would profoundly shock a large section of public opinion thereby undermining the survival of the government. Continued repayment therefore provided the British government with more time to manage these international and domestic risks and ultimately default in relative safety.

The second part of our paper seeks wider empirical validation for these claims. We assemble a large sample of countries for the interwar period to investigate the salience of bad reputation and punishment in their interplay with war debt obligations, domestic politics/sentiment and network effects or ‘spillovers’ to explain sovereign default events. Our findings help to reconcile ongoing tensions between theoretical and empirical research on sovereign default.