1. Relational Financing and Contagion in the pre-1914 Sovereign Debt Market Antonio Carlos de Azevedo Sodré Advisors: Marcelo de Paiva Abreu & João M. P. de Mello

2. Motivation Informational asymmetry, moral hazard, contractual incompleteness  credit rationing (Myers [1977], Stigltiz and Weiss [1982] and many others). Relationship lending as a technology to overcome market frictions –Theoretical papers: Rajan [1992], Petersen and Rajan [1995], Boot and Thakor [1994], Bolton and Scharfstein [1980], and Carrasco e De Mello [2006]. –Empirical Evidence US small firms: Petersen and Rajan [1994,1995], Berger and Udell [1995] Large Japanese Corporation: Hoshi, Kashyap and Scharfstein [1990], Aoki, Patrick and Sheard [1995], Aoki and Dinç [2000]

3. Motivation Why London Market for Sovereign Debt? –Hidden information and moral hazard issues. –Costly information gathering and monitoring. –Booms: 1820s, 1880s, (checar Marichal). –1870-1914: Sovereign debt securities (excluding colonies and other British Domains) represented 20% of the paid up-capital in the LSE. (Davis and Gallman [2001]). Role played by the merchant banks –Major borrowers in this market had a relationship with a merchant bank (Brazil, Russia, Chile, Argentina, Greece, Italy, Sweeden, among others). –Merchant Banks acted not only as underwriters (political and financial advise, financial representatives).

4. Motivation Were relationships informative to the final investors? Financial distress in a relational borrower could signal: –Merchant bank was less adept to monitor clients. –Merchant bank bad policy advices. –Merchant bank opportunistic behavior. Investor’s priors updating  contagion by shared underwriter Different kind of contagion than allowed by the literature –Trade linkages (Eichengreen, Rose and Wyplozs [1996]) –Portfolio realignment –Common creditor (Calvo [1998], Kaminsky and Reinhart [2000])

5. Episodes of Distress Desired characteristics of an episode of distress –Distressed country had a relational merchant bank –Debt crisis is driven by internal reasons –Presence of countries other than the borrower under distress that had a relationship with the same underwriter –No other significant market event occurring concurrently Brazilian Funding Loan (1898) –Rothschild country –War: Spain and U.S. Greek Funding Loan (1893) –Hambro country –Law’s report

6. Empirical Strategy and Data Empirical Strategy: to compare prices of bonds of governments that relate with the same merchant bank of the distressed country before and during the crisis. Primary sources: –Investor’s Monthly Manual (IMM): amount of outstanding debt, dates of coupon payments. –The [London] Times: prices, prospectuses. Bonds issued and payable in London, excluding colonies and British Domains. Prices corrected for coupon payments

7. Empirical Strategy and Data When the distress occured? What is the sample? Who are the relational countries?

8. Regression Results: Brazilian Episode

9. Regression Results: Greek Episode

10. Robustness Check

11. Robustness Check: Changing the Control Group

16. Results: Non-parametric

17. Results: Brazilian Episode

18. Results: Greek Episode

19. Conclusion Results link two seemingly unrelated financial phenomena: contagion and relation financing. Next steps: –Other crises (Chile 1887, Russia 1905) –Who are the investors?