metadata: authors: 0: author: Meyer,Josefin
1: author: Reinhart,Carmen M.
2: author: Trebesch,Christoph
count: World
docna: 0: docna: Sovereign Bonds since Waterloo
docty: Policy Research Working Paper
subtopic: External Debt,Debt Markets,Debt Relief and HIPC,International Trade and Trade Rules,Armed Conflict,Financial Sector Policy
teratopic: Finance and Financial Sector Development,International Economics and Trade,Conflict and Development
abstracts: cdata!: This paper studies external sovereign
            bonds as an asset class. It compiles a new database of
            266,000 monthly prices of foreign-currency government bonds
            traded in London and New York between 1815 (the Battle of
            Waterloo) and 2016, covering up to 91 countries. The main
            insight is that, as in equity markets, the returns on
            external sovereign bonds have been sufficiently high to
            compensate for risk. Real ex-post returns average more than
            6 percent annually across two centuries, including default
            episodes, major wars, and global crises. This represents an
            excess return of 3&#x2013;4 percent above US or UK
            government bonds, which is comparable to stocks and
            outperforms corporate bonds. Central to this finding are the
            high average coupons offered on external sovereign bonds.
            The observed returns are hard to reconcile with canonical
            theoretical models and the degree of credit risk in this
            market, as measured by historical default and recovery
            rates. Based on an archive of more than 300 sovereign debt
            restructurings since 1815, the authors show that full
            repudiation is rare; the median creditor loss (haircut) is
            below 50 percent.
repnme: repnme: Sovereign Bonds since Waterloo
display_title: Sovereign Bonds since Waterloo
listing_relative_url: /research/2022/01/33709389/sovereign-bonds-waterloo
topicv3: Trade m1326924 698,Debt Restructuring m1327213 454,Political Violence and War m1327310 2462,Financial Sector Development m1327681 1920,Revolutionary Violence m1327774 2465
publishtoextweb_dt: 2022-01-20T00:00:00Z
dois: 10.1596/1813-9450-9906
historic_topic: Finance and Financial Sector Development,International Economics and Trade,Conflict and Development
origu: Off of Sr VP Dev Econ/Chief Econ (DECVP)
no_of_pages: 129
author_keys: 0: author_key: NA
1: author_key: 124384
2: author_key: NA
model_extractions: Policy Research Working Paper 9906

# Sovereign Bonds since Waterloo

_Josefin Meyer Carmen M. Reinhart Christoph Trebesch_ Development Economics Vice Presidency Office of the Senior Vice President and Chief Economist January 2022
Policy Research Working Paper 9906

# **Abstract**

This paper studies external sovereign bonds as an asset class. It compiles a new database of 266,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering up to 91 countries. The main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns average more than 6 percent annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of 3–4 percent above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. Central to this finding are the high average coupons offered on external sovereign bonds. The observed returns are hard to reconcile with canonical theoretical models and the degree of credit risk in this market, as measured by historical default and recovery rates. Based on an archive of more than 300 sovereign debt restructurings since 1815, the authors show that full repudiation is rare; the median creditor loss (haircut) is below 50 percent.

This paper is a product of the Office of the Senior Vice President and Chief Economist, Development Economics Vice Presidency. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at jmeyer@diw.de; carmen_reinhart@harvard.edu; and christoph.trebesch@ifw-kiel.de.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# Sovereign Bonds since Waterloo

Josefin Meyer (DIW Berlin, Kiel Institute and CEPR) Carmen M. Reinhart (Harvard University, CEPR and NBER) Christoph Trebesch (Kiel Institute and CEPR)<sup>1</sup> _JEL codes_ : E4, F3, F4, G1, N0 1 We received very helpful comments from Laura Alfaro, Darrell Duffie, Rui Esteves, Gita Gopinath, Şebnem Kalemli-Özcan, Sam Langfield, Matteo Maggiori, Vincent Reinhart, Moritz Schularick, Frank Westermann and from conference participants at the NBER IFM Summer Institute 2018, the ASSA Meetings 2015, the Macrohistory Workshop in Bonn, the Sovereign Debt Conference in Zurich, DebtCon2 in Geneva, the Financial Crises conference at the LSE, as well as at seminars at UC Berkeley, Harvard, LUISS, EIEF, and at the Universities of Cologne, Frankfurt, Humboldt, Melbourne, Munich and Oxford. We also thank the editors and four anonymous referees for many helpful suggestions. Melanie Baade, Angelica Dominguez, Carl Hallmann, Moritz Müller-Freitag, Clemens Graf von Luckner, Khanh Phuong Ho, Tim Hofstetter, Torge Marxsen, Philipp Nickol, Maximilian Rupps, Sebastian Rieger, Paul Röttger, Christopher Schang and Julian Wichert provided excellent research assistance. We thank Julian Schumacher for sharing data on missed payments in recent bond defaults. Josefin Meyer gratefully acknowledges support by the European Commission’s Marie Curie Fellowship Programme under REA grant agreement no. 608129. Christoph Trebesch gratefully acknowledges financial support from the DFG Priority Programme “Experience and Expectation: Historical Foundations of Economic Behaviour” (SPP 1859) and from the Junior Researcher Fund of LMU München. All remaining errors are our own. Contact: jmeyer@diw.de; <u>carmen_reinhart@harvard.edu; christoph.trebesch@ifw-kiel.de.</u>
# **1. Introduction**

The battle of Waterloo in 1815 can be seen as the birthday of modern sovereign debt markets - and of their recurring boom-bust cycles. The Napoleonic Wars and the defeat of France and Spain accelerated the independence of a dozen new republics in Latin America, which quickly sought financing in London. The first emerging market debt boom, which also included the first Greek international bond, among others, ended abruptly in the financial panic of 1825. Since then, many similar cycles of lending and default have followed, often involving the same countries, again and again.

Given the frequent defaults and limited enforcement of external sovereign debt, why are investors attracted to this asset class? We tackle this question by examining how creditors have fared in sovereign debt markets over the short and long run with a focus on financial returns.<sup>2</sup> Two components are necessary to calculate total bond returns. The first of these is the price series. We collected monthly price quotations of 1,552 foreign-currency bonds issued and traded in London and New York over the past 200 years, with a total of 266,134 observations covering up to 91 countries, in an unbalanced sample.<sup>3</sup> Because of the recurring credit events of many of the sovereigns, prices and bond characteristics are necessary but not sufficient to calculate returns. The second required component is to quantify the investor losses due to sovereign default and debt restructurings (“haircuts”), for which we have compiled an extensive database covering missed payments, debt renegotiation terms, and face value write-downs in more than 300 debt crisis episodes since 1815.<sup>4</sup> We find that the ex-post returns on foreign-currency sovereign bonds compensate investors for the risks they face. Notwithstanding the defaults, wars, and global crises over the past two centuries, the average real yearly ex-post return on a global portfolio of external sovereign bonds was 6.9%. Thus, an investor entering this market with a one-year horizon can expect to receive on average a real ex-post return of almost 7% – about 4% higher than that of the “risk-free” benchmark of UK or US government bonds.<sup>5</sup> Excess returns are driven by the high coupons offered in this market. Not surprisingly, returns tend to be

> 2 External debt is defined here by currency rather than jurisdiction of issuance or residency of ownership. We focus on British pound and US dollar debt instruments and place of issue and trading (only those traded in London and/or New York). Hence, sample selection for our pricing data is not dictated by any priors other than location. Specifically, we start with emerging markets today and then move backward, adding sovereigns that have tapped London and New York markets in the past, including many of today’s advanced countries such as Australia, Canada, Germany, Greece, Italy, Japan, Portugal, and Spain.

> 3 London and New York were the two dominant trading centers in the 200-year sample (Michie 1987). Our country sample starts with about a dozen countries in the early19<sup>th</sup> century and grows over time, with gaps for individual countries and eras (especially the gap of the “syndicated loan era” of the 1970s and 1980s).

> 4 We use the term “haircut” to describe the size of creditor losses suffered in a sovereign default and debt restructuring. This wording is in line with the international macro and sovereign debt literature (e.g., Sturzenegger and Zettelmeyer 2008; Aguiar and Amador 2014). In finance, the term “haircut” is sometimes used differently, typically referring to a “repo haircut,” that is, the discount on the face value of an asset when valuing it as collateral in a repo transaction (Gorton and Metrick 2012).

> 5 These results, on the whole, show a higher rate of return for this asset class than a number of the earlier studies, which are mostly based on a different methodology and a more limited sample of sovereign bonds. See Section 2.

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lower in crisis-prone decades. Furthermore, the risk-return properties are in line with those of other tradable assets, in particular US and UK equities for which we also compute returns over the 200-year sample.

The results go a long way in solving a puzzle that has preoccupied the literature for decades – namely, why sovereigns can borrow again despite a history of default (Reinhart, Rogoff, and Savastano 2003; Cruces and Trebesch 2013).<sup>6</sup> High-risk countries that defaulted often manage to place bonds quickly postdefault. In 2016, Argentina re-accessed international markets only months after exiting its seventh default. The new issues included a 100-year bond, which led market observers to conclude that credit markets were overheating.<sup>7</sup> In the past years, Africa had its own issuance boom, as formerly highly indebted poor countries (HIPCs) such as Ghana or Zambia easily placed bonds abroad. Our historical results help to make sense of these market outcomes, as this asset class is characterized by a high return-to-risk ratio. This helps our understanding of why sovereign debtors can undergo repeated cycles of over-borrowing, often followed by default and a subsequent market re-entry (i.e., serial default).

Our paper departs from the literature on sovereign debt in three main ways. First, we take a different perspective – that of an investor. The bulk of the existing work takes the borrowing countries’ perspective, often focusing on the determinants and costs of default.<sup>8</sup> The second is the extensive time span and geographical coverage of our study; earlier work on creditor returns has studied short samples or a limited number of countries. The third is the granularity of our data, as we trace the financial history of more than 1,500 individual bonds at a monthly level, combining historical data on bond prices, coupon payments, and haircuts due to default. The result is the most ambitious dataset of sovereign debt to date, taking further the work of Lindert and Morton (1989), Homer and Sylla (2005), and Obstfeld and Taylor (2005), among others.

We are the first to quantify the returns on external sovereign bonds with long-run pricing data, despite the fact that this is one of the largest and oldest asset classes worldwide.<sup>9</sup> The likely explanation is data limitations. Studies on long-run asset returns typically use annual data of representative benchmark bonds or aggregate indices (e.g., Dimson, Marsh, and Staunten 2001; Jordà et al. 2017).<sup>10</sup> This standard

> 6 Eaton and Gersovitz (1981), among others, assume permanent exclusion after a sovereign default, which is at odds with the data (see also Aguiar and Gopinath 2006; Panizza, Sturzenegger, and Zettelmeyer 2009; and Cruces and Trebesch 2013).

> 7 See Financial Times, June 22, 2017, “The rush for Argentina’s 100-year bond points to an investment bubble.”

> 8 For surveys, see Panizza, Sturzenegger, and Zettelmeyer (2009), Aguiar and Amador (2014) and Mitchener and Trebesch (2021).

> 9 Historically, bonds issued by foreign governments accounted for about 10% of all financial assets trading in London (Michie 2001). Today, foreign-currency sovereign bonds continue to be a dominant asset class, especially for emerging markets. For 2017, the BIS reports a stock of US$1.9 trillion of external sovereign bonds (BIS 2018), about the same as total German government debt or about 10% of total gross US government debt.

> 10 Dimson, Marsh, and Staunten (2001) gather annual data on equities, bonds, and bills for 16 countries back to 1900. Their data on government bonds mostly builds on representative domestic currency instruments. Jordá et al. (2017) compile yearly country-level indices of asset returns, 1870-2015, for 16 countries, including housing.

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approach, however, is not viable for external sovereign debt, due to the many defaults in this market and because defaults come in different varieties and can affect bonds differently, resulting in heterogeneous outcomes (Meyer 2021). A rigorous calculation of total returns on external sovereign bonds thus requires pricing data as well as details on the fate of each bond in default, in particular on the timing and scope of missed payments and detailed restructuring terms. This type of bond-level default data is much harder to collect and was not readily available prior to this study.

The second main building block is our new archive of external default and restructuring events. We compute creditor losses (haircuts) bond-by-bond and deal-by-deal and combine the information on restructuring outcomes with our monthly bond price data. Moreover, we trace missed or partial bond payments at a monthly frequency. Because, as we establish here, coupons are the main driver of total returns in this market, it is important to measure interest payments accurately, especially during lengthy default spells. What the data reveal is that sovereigns in default on principal payments often continue to service coupons in full or in part, which pushes up investor returns. Moreover, coupon payments on the same bond can vary markedly over the course of a crisis. The granular repayment track record thus allows us to build monthly total return series on a bond-by-bond basis in a consistent manner, as well as representative country and global portfolios over long time spans.

Thirdly, we compile an extensive supplementary database that provides unique insights into the liquidity of this asset class. We gathered monthly, bond-level bid-ask spreads over two centuries, covering 62% of our pricing sample (in total 165,638 observations, see Figure B3).

Our results are hard to reconcile with seminal quantitative models of sovereign default. Until recently, this literature assumed risk-neutral investors and sovereign risk premia that solely reflect the expected losses from default (e.g., Aguiar and Gopinath 2006; Arellano 2008; Mendoza and Yue 2012). When investors are risk-neutral, excess return above “risk-free” bonds should be zero in expectation. Yet, we find real excess returns that are in the range of 2% to 4% ex-post for the full global sample, although there is considerable time variation. Thus, investors typically receive a compensatory premium for holding sovereign risk that exceeds historical credit losses. This finding gives support to a growing body of quantitative work that assumes risk-averse (or uncertainty averse) creditors in this market.<sup>11</sup> The high returns we observe cannot be easily explained by historical default and recovery rates. Using our new default and restructuring database, we show that sovereign defaults do not usually wipe out the claims of private creditors. Almost all the defaults over the past 200 years have been solved by a debt exchange of old into new debt at a discount – with an average haircut of 44% and a standard deviation of

> Compared to these studies, we zoom in on one asset class and cover 91 countries, 200 years at monthly frequency, and instrument-level data.

> 11 See Barro’s discussion of rare disasters with Epstein-Zin preferences (Barro 2006) and, more recently, Broner, Lorenzoni, and Schmukler (2013), Lizarazo (2013), Borri and Verdelhan (2015), Aguiar et al. (2016), Grosse Steffen and Podstawski (2016), Pouzo and Presno (2016), and Asonuma and Joo (2018).

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30%. Moreover, we find that bond prices often recover relatively quickly during and after default spells, although the variation across episodes is also large. On average, creditors recoup their pre-crisis investment (measured one year before) within five years after the default; and in 25% of cases (upper quartile), investors recover their losses in less than one year. There are, of course, outlier episodes involving major upheavals such as wars, revolutions, or the break-up of empires (e.g., in Austria-Hungary, China, or Russia). However, in the majority of debt crises, investor losses are partial. Debt repudiation cases are comparatively rare.

On a more general level, our results reveal many parallels to the case of equity. As is the case for stocks, we find that sovereign external bonds show high excess returns coupled with a relatively low return volatility. The seminal work by Mehra and Prescott (1985) showed that standard asset pricing models are not able to reproduce the large empirically observed wedge between risky and riskless assets. Their contribution was followed by a stream of studies on the equity premium puzzle, largely focusing on the United States after World War II (WW2) (see Kocherlakota 1996; Campbell 2003). Compared to the literature on long-run equity returns, our analysis of external bonds covers far more countries, particularly encompassing emerging markets and developing countries. It also goes much further back.<sup>12</sup> There are, however, gaps in the bond pricing series of individual countries, and the market for external sovereign bonds shrinks in the Bretton Woods era of capital controls, and all but disappears during the syndicated bank lending spell of the 1970s and 1980s (our average country coverage is 70 years). There is also research on the “credit spread puzzle” for corporate bonds, typically using data from the past 30 years.<sup>13</sup> The high excess returns on external sovereign bonds have received much less attention, in large part because earlier studies found little evidence of excess returns in the first place (Section 2).

Because we quantify the outcome of each default episode, our analysis moves away from the typical binary approach in the literature where a country is either in default or it is not. Like for currency or inflation crises, orders of magnitude matter. We measure the magnitude of these “credit events” both in terms of haircuts and in terms of amounts in default, which allows identifying the shades of gray across countries and time.<sup>14</sup> The data show that credit events in this market are best described as partial defaults with re-contracting, in the spirit of Bulow and Rogoff (1989), rather than as full defaults, as is typically

> 12 Barro and Ursua (2008) use returns data starting in the late 19th century for about 30 countries using Global Financial Data (GFD) as source. Dimson, Marsh, and Staunton (2001) and Jordà et al. (2017) cover 16 countries, starting in 1900 and 1870, respectively. All three contributions use annual data, as do Mehra and Prescott (1985), who focus on the United States, 1889-1978. We use monthly data and start in 1815, with a country sample starting from a dozen in the 19th century and growing over time.

> 13 Chen, Collin-Dufresne, and Goldstein (2009) and Chen (2010) study the credit spread puzzle for corporate debt and summarize the literature on this issue. Asquith, Mullins, and Wolff (1989) is an early study on the high excess returns on US junk bonds.

> 14 There is already ample data on the occurrence and duration of sovereign defaults (e.g., Standard and Poor’s 2006, Reinhart and Rogoff 2009, or Asonuma and Trebesch 2016), but there is no long-run dataset on sovereign recovery rates thus far.

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assumed (e.g., Eaton and Gersovitz 1981, Aguiar and Gopinath 2006, Arellano 2008, Broner, Martin, and Ventura 2010).

Finally, our study is the first to offer a 200-year perspective of sovereign bond pricing. Compared with Mauro, Sussman, and Yafeh (2002), for example, we add 60 years of data pre-1870, as well as the entire spell before, during, and after WW1 and WW2, when co-movement in sovereign bond prices was higher than in the relatively tranquil pre-1913 spell. Our 200-year dataset has a monthly frequency and can be explored at the global, country, and bond levels.

The paper proceeds as follows. In the next section, we review the related literature, especially work measuring sovereign haircuts and investor returns. Section 3 describes credit events and investor losses (haircuts) on external sovereign debt across two centuries, while Section 4 moves beyond defaults and documents the history of sovereign bond prices and returns over the very long run. Section 5 explores the behavior of returns around debt crises to understand investors’ recoveries in this market. Section 6 focuses on risk-return comparisons across asset classes. Section 7 concludes and lays a path for future research.

# **2. Previous studies: Sovereign debt returns and haircuts**

The related literature can be broadly grouped into two categories: papers that quantify rates of return on sovereign debt or related emerging market investments and a literature that provides estimates of haircuts and recovery rates for sovereign credit events. By and large, our results on bond returns and haircuts turn out to be similar to the existing body of work, whenever meaningful comparisons are possible. The main contribution is to provide a much more comprehensive picture, covering all countries for which external bond data were available and spanning the complete 200-year picture.

In the literature on investor returns, several earlier papers calculate internal rates of return (IRRs) to assess how creditors have fared in sovereign debt markets (i.e., until the bond is extinguished). IRRs take the perspective of a buy-and-hold investor and discount cash flows over the life span of a debt instrument (from issuance until maturity or sample end).<sup>15</sup> IRRs have the benefit that they do not require collecting market prices, so that they can be calculated for all types of instruments, even for bonds not traded on the market. The main drawback of IRRs is that, despite requiring much data work, they provide only one data point per instrument, namely the bond’s return over the entire holding period. Indeed, IRRs assume that investors buy a sovereign bond instrument at issuance and never sell it. This is unlikely to be true for most investors, today and also prior to WW2 when sovereign bond maturities typically exceeded 30 years. Price-based returns are a more flexible measure and can be used to address a much broader range of

> 15 Specifically, IRRs (or I ) can be extracted from the cash flow data to yield a net present value of zero, as follows: C 0 = N 0 + ∑ ~~,~~ where is bond maturity, C are debt payments (coupon and amortization) in II I )<sup>tt</sup> TT rr tt year , and NN= −NN0 is the purchasing price, that is, the issue price of the bond.  tt=1 (1+rr II TT tt tt NN

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research questions. Most obviously, price-based returns can be traced over time, by computing time series of daily, monthly, or yearly returns.

Lindert and Morton (1989) conducted the most comprehensive study on long-run sovereign bond returns thus far. They compute IRRs for 10 countries between 1850 and 1983, covering more than 1,000 sovereign, sub-sovereign, and corporate bond instruments. They find average realized nominal returns of 4.5%, realized real returns of 2.5%, and excess returns of 0.4%. In Appendix B3.1, we compare our results with theirs in detail and present a conceptual section on the different return measures (using their data as cleaned by Esteves [2013]). At the bond level, we find very similar results when comparing IRRs with price-based holding period returns. At the aggregate level, however, the reported averages by Lindert and Morton (1989) are lower, for two reasons that are less of a concern in our analysis. First, two outliers (Russia and Turkey) decrease the average return in their sample. After WW1, both countries entered defaults that took decades to resolve, due to Russia’s Communist revolution and the breakup of the Ottoman Empire, respectively. In our much broader sample, outliers and lengthy defaults of individual bonds carry less weight. Second, Lindert and Morton (1989) include municipal and corporate bonds, which leads to lower aggregate returns, as we show in the appendix. We focus on sovereign bonds only, which have higher returns, on average. Another reason why their averages seem lower is that Lindert and Morton (1989) show buy-and-hold returns only, while we focus on average annual portfolio returns, as is standard in the finance literature. We nevertheless show geometric returns throughout our paper and researchers using our dataset can compute holding period returns for any period of their choosing.

Eichengreen and Portes (1988, 1991) focus on the interwar years and show that these were a bad period for investing in external bonds. Over the decade of the 1920s, nominal rates of return were around 4%5%, which is similar to what we find in the 1920s and only slightly higher than the returns on UK or US government bonds.<sup>16</sup> For an era that predates our Waterloo starting point, Drelichman and Voth (2011) also calculate IRRs and find substantive (profitable) returns on short-term loans to King Philipp II of Habsburg Spain, despite his notorious serial defaults.<sup>17</sup> Klingen, Weder, and Zettelmeyer (2004) study the return performance of sovereign debt in a large sample of developing countries between 1970 and 2000, including, importantly, the dominant form of lending in that era, syndicated bank loans. To estimate returns they use aggregate bank and bond flows, public and

> 16 These averages combine sovereign, sub-sovereign (e.g., regional), and corporate bonds. Less than 20% of bonds in Eichengreen and Portes (1988, 1991) were issued by a sovereign.

> 17 There is also a literature studying the overall portfolio return of British overseas investments before WW1 using price data, but with no emphasis on sovereign debt. Edelstein (1982) finds that British investors gained a higher return abroad than at home, using returns on 566 foreign stocks and bonds (private and sovereign), 1870-1913. Goetzman and Ukhow (2006) use the same data but apply modern portfolio theory. Chabot and Kurz (2010) compute returns on more than 4,000 stocks and bonds (private and sovereign) trading in the United Kingdom and the United States during 1866-1907. They report significant excess returns on foreign government bonds compared with UK government bonds. None of these contributions mentions how the numerous sovereign defaults and restructurings are accounted for.

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private. On average, they find a 9% nominal return, comparable to that of US Treasury bonds at that time (zero premia), but there is substantial time variation. Appendix B3.2 shows that we get very similar results in those subsamples of their dataset for which pricing data exist. Furthermore, in Appendix B4, we add evidence on the 1970s, 1980s, and early 1990s, partly based on secondary market price data for syndicated loans 1985-1993. The results confirm those in Klingen, Weder, and Zettelmeyer (2004): sovereign debt returns were very low in the late 1980s and very high in the early 1990s.

Following large-scale debt restructurings in the early 1990s under the Brady Plan, fixed income markets reemerged as a dominant source of credit to emerging markets. The recent literature mostly explores this post-1990 sovereign bond era with an approach closer in spirit to the one developed in this paper, typically using JP Morgan’s Emerging Markets Bond Index (EMBI) country series (e.g., Broner, Lorenzoni, and Schmukler 2013; Borri and Verdelhan 2015; Andritzky and Schumacher 2018).<sup>18</sup> The results highlight excess returns by country in the 3%-15% range, which is significantly higher than those reported by papers studying the pre-1990s and in line with our results.

A broad takeaway from this previous literature on bond returns is that, historically, emerging market debt delivered returns that were only slightly above the risk-free rate. This made it all the more puzzling why investors continue to flock to this asset class in their search for high yield. Compared with that body of research, we provide a more representative and encompassing picture of the external sovereign bond market. Our bigger sample gives less weight to individual defaulters (like Russia) or episodes that were particularly turbulent (like the Great Depression). We also disregard the (lower) returns of sub-sovereign bonds. Instead, we focus on external sovereign bonds and include all episodes for which price quotations exist, including spells with very high returns in the aftermath of wars and crises, as well as during the boom decades of the 1840s, 1860s, 1880s, 1940s, 1950s, 1990s, and the 2000s (many of these were not included in previous studies).

A necessary ingredient for the calculation of ex-post returns is to account for losses due to default or restructuring, which requires data on missed payments and recurring debt exchanges. The research on sovereign haircuts has been largely confined to the modern period (post-1970s), and this sample is dominated by defaults and haircuts on sovereign syndicated bank loans, plus about 20 recent restructurings of sovereign bonds. In pioneering work, Sturzenegger and Zettelmeyer (2006, 2008) compute investor losses in eight sovereign bond restructurings since 1998, finding haircuts in the range of 13%-73%. Using a similar approach, Cruces and Trebesch (2013), whose study encompasses 187 restructuring events of sovereign bonds and syndicated bank loans since 1978, calculate an average haircut of 38%. Moody’s (2012), Asonuma, Niepelt, and Ranciere (2017), and Fang, Schumacher, and Trebesch

> 18 Broner, Lorenzoni, and Schmukler (2013) use Bloomberg and JP Morgan EMBI data for eight countries between 1993 and 2003, covering two default spells. Borri and Verdelhan (2015) use EMBI aggregate indices for 41 emerging market countries over 1995-2011, including eight default events on sovereign bonds.

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(2020) focus on about 20 bond external debt restructuring events since 1998 and report comparable average haircuts.

The study of historical haircuts has been limited to estimates for seven Latin American countries, as provided by Kaminsky and Vega-Garcia (2016) for 24 restructurings between 1815 and 1939 (average haircut of 48%), as well as by Jorgensen and Sachs (1989) on four interwar restructurings. There is of course a large literature on the incidence of defaults in history (e.g., Suter 1992; Reinhart and Rogoff 2009, and references therein). However, this literature has been silent on the magnitudes of investor losses, which shows considerable variation across episodes and over time.

A strand of research that is closely related to the default dimension, although not focused on the sovereign debt market, is the work on corporate credit events (see Duffie (2011) for an overview).<sup>19</sup> For corporate debt, creditor recovery rates (one minus the haircut or “loss given default”) are typically measured using prices around default, most often the trading price 30 days after the default event (e.g., Moody’s 2011a). A limitation of this price-based approach is the arbitrariness of the dates chosen, which vary in the academic literature and across industry reports.<sup>20</sup> An alternative is the concept of “ultimate recovery,” which is defined by Moody’s (2007) as “the recovery values that creditors actually receive at the resolution to default, usually at the time of emergence from Chapter 11 bankruptcy proceedings.”<sup>21</sup> Ultimate recovery rates are the closest analog to the widely accepted estimation approach in the sovereign debt literature, in the vein of Sturzenegger and Zettelmeyer (2006) and Cruces and Trebesch (2013), according to which haircuts are computed via discounted present value cash flows at the exit from restructuring.<sup>22</sup> The average recovery rate for US corporate bonds reported by Moody’s (2007) is 37% for defaults between 1987 and 2006 (implying a haircut of 63%), while Jankowitsch, Nagler, and Subrahmanyam (2014) find an average recovery rate of 38.6% for 2002–10. This suggests that the average corporate bond haircut is 15 to 20 percentage points higher than for the typical sovereign debt restructuring.

> 19 This literature includes two recent long-run studies on corporate defaults by Giesecke et al. (2011) and Moody’s (2011a), which go back to 1866 and 1920, respectively.

> 20 Moody’s (2011a) uses the price “roughly” 30 days after a default event. Early S&P reports use the average price 30 to 45 days post-default, while more recent S&P reports focus on exactly 30 days after a default event. Jankowitsch, Nagler, and Subrahmanyam (2014) use average prices of the first 30 days after default.

> 21 The preferred approach by Moody’s is to use the trading price of the old defaulted instruments at the first available date of or after emergence from default.

> 22 “Ultimate” in this terminology refers to the end of the default spell, that is, realized losses in the wake of a finalized restructuring, not to when bonds finally mature. In a special report on sovereign debt, Moody’s (2011b) estimates recovery rates in 16 sovereign defaults since 1998, comparing 30-day post-default bond prices with estimates based on a present value method at the exit from restructuring. They report that “the two approaches to estimating recovery values generally produce similar estimates” (p.14). In Appendix C2.3, we draw a similar conclusion for our much larger 200-year sample of haircuts and bond prices.

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# **3. Creditor losses in historical perspective**

This section shows that creditor losses due to default and restructuring events occur fairly often in external sovereign debt markets. However, the losses are almost always partial. Debt repudiations (unilateral debt cancelations) are rare, and defaults typically end in a negotiated settlement with haircuts well below 100%.

As explained in the introduction, we follow the international macro literature and use the term “haircut” to describe the size of creditor losses suffered in a sovereign default and debt restructuring. Finance scholars and practitioners also refer to “loss given default” (LGD), or one minus the “recovery rate” of a bond, which is exactly what our haircut estimates aim to capture for sovereign defaults. There is no consensus on the exact measurement of corporate bond recovery rates, however (see the survey by Altman 2011). Most but not all contributions use bond prices to approximate creditor losses in a corporate default, but the dating to choose the relevant bond price differs. Some contributions choose an (arbitrary) date at the start of default, for example, the bond price 90 days post-default (Moody’s 2011a; Jankowitsch, Nagler, and Subrahmanyam 2014), while others focus on bond prices at the exit from default (e.g., Moody’s 2007). The latter approach is sometimes called “ultimate recovery rates” and is conceptually close to ours since we compute haircuts at the restructuring date (default exit). Moreover, in Appendix C2.3 we show that our haircut estimates have a high correlation with bond prices at the start of default (for 94 cases for which prices were available).<sup>23</sup> In sum, our haircut estimates can be regarded as a valid measure of sovereign LGDs in the vein of existing corporate LGD databases.

# 3.1. Sovereign debt restructurings, 1815–2016

To estimate haircuts requires moving well beyond identifying the incidence of debt crises, as in Reinhart and Rogoff (2009) and others. We conduct a census of all distressed sovereign debt restructurings with foreign commercial creditors from 1815 to 1980. We then combine this historical sample with the updated restructuring and haircut dataset of Cruces and Trebesch (2013), which covers 1978–2013, and with Fang, Schumacher, and Trebesch (2020), to add events until 2016. The result is a full sample of sovereign debt restructurings with foreign banks and bondholders for 1815–2016. To select cases, we apply the same criteria as in Cruces and Trebesch (2013) and focus on:

- (i) Distressed restructurings, defined as exchanges of debt at a loss (as in Moody’s 2012).

- (ii) Restructurings of external sovereign debt, meaning bonds or loans by the central government and owed to private, foreign creditors, that is, international banks or bondholders. We do not include sub-sovereign bonds (as these are a separate asset class), private-to-private debt

> 23 One can use the bond prices in our database to compute any price-based recovery rates of choice. Figure C.3 in the Appendix does so, using sovereign bond prices at the _start_ of default (90 days post-default, as in Moody’s 2011a), and compares them to our set of haircut estimates at _exit_ from default (we compute discounted payment streams at the restructuring date). The two measures are highly correlated, suggesting that, at the entry into default, the market does well at predicting recovery rates at the exit from default.

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restructurings, or those involving official creditors such as government-to-government debts (see Reinhart and Trebesch (2016) and Schlegl, Trebesch, and Wright (2019) on official restructurings). Restructurings on domestic-currency sovereign debt are not included.

(iii) Restructurings of medium- and long-term debt. We thus exclude short-term rollovers or bridge financing deals, or other temporary arrangements between debtors and creditors (see Cruces and Trebesch [2013]).

(iv) Finalized deals. We disregard restructurings that were agreed on but were never de facto implemented, for example, when country parliaments reject an agreement.

We rely on a wide variety of sources to compile our restructuring and haircut archive. Importantly, we focus on the annual reports of bondholder organizations that negotiated with defaulting countries in the 19th and early 20th centuries, in particular the British Corporation of Foreign Bondholders (CFB), the US-based Foreign Bondholders Protective Council (FBPC), and the French Association Nationale des Porteurs Franҫais de Valeurs Mobiliéres. The reports provide rich details on past defaults and restructurings and are therefore our most important source. To cross-check the information by the creditor committees and to fill gaps in the data, additional sources were used, in particular annual investor reports such as Fenn’s Compendium of the English and Foreign Funds, Fortune’s Epitome of the Stock and Public Funds, Kimber's Records on Government Debts and other Foreign Securities, Moody's Manuals on Foreign and American Government Securities, and the London Stock Exchange Yearbooks. In addition, we incorporate in our comprehensive database case studies from the literature, communiques of the creditor organizations, official gazettes of the debtor country, and press articles. Our integrative approach compares each data point in the restructuring agreements and the debt instruments involved across available sources.

The final sample used in the analysis includes 313 external sovereign debt restructurings in 91 countries between 1815 and 2015.<sup>24</sup> This number represents a lower bound, since we summarize multiple restructurings into a single event if they resulted from the same default event (for example, when the negotiation process of a given default results in separate restructurings for different creditor groups or bond currencies, such as restructurings of USD vs. GBP bonds; see Meyer [2021]). More specifically, we combine a total of 358 individual restructurings into the final event sample of 313 cases, so that each default receives just one haircut estimate. We use restructuring amounts in USD as weights when combining cases. Appendix C provides more details and a breakdown by country. Figure 1 shows the yearly distribution over 200 years for the entire 358 case sample, while in the remainder of the analysis we use the final sample of 313 restructuring cases (with combined restructurings).

> 24 For 68 of the 91 defaulters, we could also construct monthly bond price series. For the remaining 23 countries, we estimated haircuts but have no price data. In addition, we collected price data for another 23 countries that never defaulted on their external debt obligations (see Section 4), bringing the total pricing sample to 91 countries.

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Figure 1: Sovereign debt restructurings with foreign private creditors, 1815-2016 <!-- Start of picture text --> 16<br>Bank loan era<br>14 (1970s-<br>mid-1990s)<br>12<br>Bond era<br>10 (pre-WW2) Modern<br>bond era<br>8 (since<br>mid-<br>6 1990s)<br>4<br>2<br>0<br>Bank debt restructurings Bond restructurings<br>18151824183318421851186018691878188718961905191419231932194119501959196819771986199520042013<br>Nr. of restructurings per year<br><!-- End of picture text --> _Note_ : This figure shows the number of external sovereign debt restructurings (vertical axis) for each year, 1815-2016. Bank debt restructurings occur exclusively in the period 1970 to 2000. Restructurings of official debts (e.g., bilateral debt among governments or debt owed to the IMF and other official multilateral institutions) are not included. Domestic debt (local currency bonds not traded in London or New York) is not included, as this is a separate asset class.

# 3.2. Measuring haircuts

To measure sovereign haircuts, we follow the standard approach in the sovereign debt literature, namely that proposed by Sturzenegger and Zettelmeyer (2006, 2008) and used by Cruces and Trebesch (2013) and Moody’s (2012), among others. The haircut in restructuring at time is calculated by comparing ii the net present value (NPV) of the contractual payment streams of the tt _new debt_ issued in the restructuring HH ii tt with the NPV of the _old debt_ in default (accounting for arrears and cash payments). Both payment streams are discounted using the same interest rate at time : rr tt <u>�</u> = 1 −<sup>_Present value of new debt_</sup><sup><u>�rrtt</u></sup> ii (1) _Present value of old debt_ � ii tt ii HH tt This measure captures the wealth loss of an investor participating in a debt restructuring because it �rr accounts for the characteristics of both the old and the new debt, in particular, any change in the maturity and interest structure. More intuitively, compares the present value of the new and the old debt in a ii hypothetical scenario in which the sovereign keeps servicing any remaining outstanding old debts on an tt HH equal basis as the newly issued debt. Imagine a small holdout creditor who avoided a haircut and whose old, non-exchanged bonds continue to be repaid as if no default happened (akin to what happened to the €6 billion holdouts on English law bonds in Greece in 2012 [Zettelmeyer, Trebesch, and Gulati 2013]). Equation (1) captures how such a holdout creditor fares in comparison with all other creditors that participated in the exchange and received new bonds at less favorable terms than the old ones. For a 11
meaningful comparison, the same discount rate must be applied to compute the NPV of the new bonds and the old (holdout) bonds. Both old and new bonds face the risk of another default in the future and they both benefit from the debt relief effect of the restructuring.

Haircuts are computed on a bond-by-bond basis. Because of the heterogeneous nature of the debt renegotiations, it is not possible to simplify the calculations by relying on a “representative bond.” Here we use information on a total of 1,134 defaulted sovereign bonds.<sup>25</sup> To compute aggregate haircuts for each restructuring event, we build a weighted average haircut across restructured bonds and use amounts outstanding for weighting purposes. To choose the discount rate , we follow Sturzenegger and Zettelmeyer (2006) and Cruces and Trebesch ii (2013) and use the “exit yield,” which is the secondary market yield of the new bonds that start trading tt rr after the restructuring. This rate reflects the expected risk of a future default on the new obligations, taking into account the success (or failure) of the restructuring that was just implemented. as well as existing liquidity conditions in that market, an issue we take up in Section 4. Whenever possible, we use the secondary market yield of country _i_ in the month after the exit from default, using the bond pricing data summarized in Section 4. For 32 debt restructurings, no market yield data were available, mostly in small countries and low-income countries with no liquid bonds trading in London and New York. In these cases, we use a “worst yield” approach, by using the highest bond yield observable among non-defaulted sovereigns in London or New York at that point in time as a proxy for the country’s own exit yield. Appendix C2 provides further details and shows robustness checks when using alternative discount rates. Among other checks, we apply a 10% flat rate to all deals, as well as a “risk-free” lower bound rate, by using the yield on UK or US long-term government bonds at the time of the restructuring.

To make the estimates as comparable as the data permit, we apply the same haircut computation approach across the entire 200-year span. The required simplifying assumptions are discussed in detail in Appendix C. The Appendix also discusses how we deal with the so-called “sinking fund” structure of many historical bonds, bond buyback options, gold and currency clauses, or country-break ups. Moreover, we show results for alternative haircut measures, in particular the face value (nominal reduction) haircuts and for the socalled “market haircut,” which compares the face value of the old debt to the present value of the new debt. In addition, we check the correlation between our haircut estimates and bond prices around the start of default. This is relevant because, as noted above, the corporate debt literature typically uses market prices at the default onset to estimate bond recovery rates. Taken together, we find that the haircut formula and the choice of the discount rate matter, in particular for the estimated means, but the overall picture and the dispersion of haircuts across space and time is similar, irrespective of the method used.

> 25 We have pricing data for only a subset of these defaulted bonds.

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# 3.3. Restructurings and private creditor losses across 200 years

Figure 2 shows the main result on creditor losses, by plotting the size of haircuts (vertical axis) in restructurings of external sovereign debt between 1815 and 2016 (horizontal axis). As explained, the data since 1975 come from Cruces and Trebesch (2013) and predominantly include haircuts on sovereign bank loans (plus about 20 recent sovereign bond defaults). This study adds the preceding 160 years, and thus, haircut estimates for more than 150 bond defaults for which no data existed. Each observation represents one restructuring spell, where the size of haircuts is averaged across all instruments involved (volumeweighted). The size of the circles represents the inflation-adjusted amounts of debt affected by the restructurings (in real 2009 USD). Some of the haircuts shown are negative, but these are only 10 events, and they mostly occur at the start of debt distress.<sup>26</sup> To complement this picture, Table 1 provides summary statistics and adds information for different haircut measures.

Figure 2: Haircuts in sovereign debt restructurings with foreign private creditors since 1815 <!-- Start of picture text --> Haircut,<br>in % 100 ESP PRT MEX DOM GRC RUS HND CHN L ESTTUVA CUB<br>ROU SRB YEM LBR<br>TURPER NIC<br>COL NIC TUR COLLBR MEX BGRBOL GRCCZKPOL BOLMOZGUYUGAZMBSTPSLENICMRTETHSENTGOBIHGINGUYCMRTZAIRQMOZCOG<br>VEN MEX COL VENCRIMEX ECU CRI TUR MEXSLV AUT NERALB HND<br>ARGSLVCOL HND PRY CZKCHLPERECU HUN HNDCRIBOL SRBARGECU<br>PER SLV PERCIV KNAGRC<br>GRC COL POL<br>500 MEXESP PRTCRIMEXCHLPRTPERBRAECUGTMPRTVEN VEN MEXESP EGYEGYURYEGYBOLESPCHLPRYGTMARGURYDOMARG VEN GTMECUSRBNICDOMECUGTMBRAMEXSLVPRTTURVENCOLDOMECUCRINICGTM BRA NIC LBRSLVPRYMEXBGRTURSLVCRIDOMGRCCHLLBRCRIHUNCHNNICCRICUBDEUPOLPERURYPANBRAGTMPRY FIN THAITA AUTCRIJPNDEU JAM JAMTURCODNICMDGJAMNICROUTURLBRPOLNICMEX NGA MWICODROUCUBURYCHLECUPERCRIMDGNGACOD BRA CUBJAECUNERSRBPOLSENNICMEXARGCODCUBJAMSDNECUPANSRBSENCRIDOMMARCODROUBRAVENURYCHLNERPHLMDG M MARNGAARGCODGABJAMCHLPHLZAFGMBMEXMWINGACOGBRAVENURYTGOPOLSRBGINNGAEXCODTTOPOLZAFMDGMARMEXVENJAMCHLPHLSENNGAURYDZAPHLARGPRYZAFJORDOMGABBGRBRAPOLSVNECUDZAHRVPANMKDVNMRUSUKRKENPAKUKRECURUSRUSMDAURYDMAMDADOMGRDBLZSYCCIVCIV BLZ GRDUKR<br>PER<br>PER BRA UKR<br>ZWE<br>1815 1835 1855 1875 1895 1915 1935 1955 1975 1995 2015<br><!-- End of picture text --> _Note:_ This figure shows the size of haircuts (as a % of debt affected) in sovereign debt restructuring spells with external banks and bondholders over the past 200 years. The calculations are based on equation (1) as well as the methodology and data sources described in the text and Appendix C. The circle size captures the amount of debt involved, adjusted for inflation (based on constant 2009 USD).

> 26 In these early stages of a crisis, sovereigns may do what it takes to avoid a default, for example, by extending debt maturities at higher interest rates than before. These deals do not imply debt relief, but may nevertheless be beneficial for the government, at least in the short term, as these may smooth out repayment and may reduce potential rollover risks. Often proving insufficient to deal with the debt sustainability problem, these initial deals are followed by later restructurings with larger haircuts.

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There are two main insights from an analysis of the haircut data. First, there are strong recurring features over time. Over the entire 200-year span, average haircuts and their variation are surprisingly similar. The level of creditor losses averaged between 40% and 50% – with no visible time trend or outlier spells. Every decade since 1815 featured a few sovereign restructurings. The only major exception is the period between WW2 and the 1970s. This is the Bretton Woods era with closed capital accounts and very limited private cross-border lending, so that barely any new defaults or restructurings on privately held sovereign debt occurred. Since the 1980s, we have seen a sharp increase in the number of sovereign restructurings, which also owes to the fact that the number of independent countries is much higher today. The standard deviation of haircuts is large throughout the sample, at about 30%. Some deals imply low haircuts of less than 20% while others reach 80% or more. Thus, the historical haircut statistics resemble those of more recent decades, despite the fundamental changes in institutions and markets since the 19th century.<sup>27</sup> Table 1: Sovereign haircuts with foreign private creditors (1815-2016)

||Cases|Mean|Median|SD|Min|Max|
|---|---|---|---|---|---|---|
|**Haircuts across time**(by default-restructuring event)|||||||
|Full sample (1815-2016)|313|44|39|30|-14|100|
|_Historical_sample (defaults pre-1970,<br>only bond restructurings occurred, no bank debt)|138|51|48|32|-14|100|
|_Modern_sample (defaults post-1970,<br>incl. 152 bank debt defaults and 23 bond defaults)|175|39|34|28|-10|97|
|... subsample of 23_recent bond restructurings_|23|37|37|21|6|77|
|(note: first “modern” bond exchange is 1998)|||||||
|**Alternative haircut measures**|||||||
|_Weighted_haircuts_,_by amount restructured|313|39|30|27|-14|100|
|_Face value_haircut|313|24|0|34|-15|100|

_Note:_ Some of the haircuts shown are negative, but these are only 10 events and they mostly occur at the start of debt distress (see Footnote 27). A negative face value haircut only occurred in one case: the Mexican restructuring of 1864 (-15%), since interest arrears were capitalized into new debts at a rate above 100% (for every 0.66 pounds of arrears outstanding, creditors received new bonds at a face value of 1 pound). Weighted haircuts use restructured amounts in real terms (2009 USD).

A second main insight is that debt repudiation and debt cancelations (haircuts of or close to 100%) are the exception rather than the rule. This is true even for the most tumultuous episodes of modern history, such as after the Great Depression and in the wake of major wars. The average haircut in the full sample is 44% and drops to 39% once we calculate weighted haircuts (i.e., weighted by restructuring amounts in USD). The historical average haircut is somewhat higher than that of recent decades, owing largely to the

> 27 Like Cruces and Trebesch (2013), we obtain negative haircuts for a small subset of cases, most of which happened in the first half of the 1980s. Negative haircuts typically result from a restructuring in which the interest rate on the new debt exceeds the estimated discount rate prevailing at the time. In such cases, any lengthening of maturities will increase the present value of the new debt, instead of decreasing it (note that most deals in the 1980s involved rescheduling only). While these look like bad deals for the government, a successful agreement can buy time and avoid a disorderly default. These benefits can outweigh the drawback of accepting a deal at unfavorable terms.

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fact that many of the defaults in the early 19th century and those of the 1920s and 1930s took decades to resolve. But the median historical haircut is nevertheless below 50%. In conclusion, creditor losses are mostly partial, not full. Default is not a binary (0,1) process, as usually modeled in the related literature.

Arguably, the most infamous defaults involve revolutions and debt repudiations. For instance, Lenin canceled all external debts in the wake of the Communist revolution of 1917. Other drastic cases of debt wipe-outs (full cancelations) include the Communist take-over of China in 1949 after the Maoist revolution<sup>28</sup> and Cuba in 1960 after the Castro revolution.<sup>29</sup> In addition, we identified five cases in which a new government or ruler refused to service debts incurred by a previous regime (selective cancelations): Spain 1824 (on bonds incurred by the Cortes of Cádiz), Greece after 1826 (on bonds raised by the militias fighting for independence), Portugal in 1834 (on bonds by Dom Miguel), Mexico in 1865 (by Benito Juárez, on bonds issued by Maximilian I), and the Dominican Republic in 1872 (when its Senate enacted a law repudiating external bonds). In most repudiation cases, the debts remain in default until today or were in default for more than a generation. The two exceptions are Spain and the Dominican Republic, which settled after 10 and 16 years, respectively, at haircuts of 40% and 95%. An additional noteworthy case is that of the short-lived bonds issued by the Confederate States of America in London in 1863, which were declared as “illegal and void” after the American Civil War.<sup>30</sup> Aside from revolutions and draconian regime changes, we find that haircuts are often very high when a country or empire is dissolved (see Appendix C2 for further details on how we deal with country breakups). For example, the defaulted debt of the Austrian-Hungarian Empire was only settled in the 1970s with an average haircut of 98%, while the bonds of the three Baltic countries were fully canceled after the Soviet occupation in August 1940. In the modern period, 100% haircuts are only observable for a small number of HIPCs, which defaulted in the 1980s and took nearly 30 years to settle. On the intuition for why weighted haircuts are lower, this reflects the fact that for the poorest countries, where haircuts tend to be deeper, the amounts of debt involved are usually much lower, especially since WW2.

> 28 China’s external bonds had already been in default since 1939, but only after Mao came to power were these debts declared canceled and void.

> 29 Many other countries that saw a Communist take-over also saw long delays and very high haircuts, but explicit debt cancelations only occurred in China, Cuba, and Russia.

> 30 The repudiation of all Confederate debts was ratified in the 14th Amendment of the US Constitution in July 1868. Its section 4 reads: “neither the United States nor any state shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.” There was one Confederate bond issued in foreign currency (British sterling) in London, but that bond is not included in our main database since it was illiquid and only had about a dozen monthly pricing observations scattered over the years (see Appendix B1).

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# **4. Sovereign bond returns, 1815–2016**

# 4.1. Sovereign bond pricing database: Sample and sources

This section presents our newly assembled, comprehensive dataset on sovereign bond prices and explains how we compute bond returns. Compared with Section 3, we thus move beyond sovereign default and restructuring situations and instead track the performance of foreign-currency sovereign bonds using bond prices. We start in 1815, during the decade in which London emerged from the Napoleonic Wars as the world’s dominant financial center (Michie 2001). While our data span until September 2017, we mainly show results through end-2016 to include only complete years.

To assemble the long-run bond pricing database, we include all external sovereign bonds for which we could find pricing information on the London or New York Stock Exchange (LSE and NYSE). In line with the above, we focus on bonds issued by central governments in foreign (USD and GBP) currency. We include bonds with a maturity of at least one year and those with a fixed coupon rate, thus dropping a small number of floating rate instruments in the modern sample. Throughout, we coded end-of-month price quotations.

We rely on several main sources of bond price data. For the pre-1870 period, we use prices from the Money Market Review, The Economist, Circular to Bankers, Course of the Exchange, and Banker’s Magazine. For the 1870-1930 period, we greatly benefitted from the work by William Goetzmann and Geert Rouwenhoorst, by using their digitized bond-level pricing data from the British Investor Monthly Manual.<sup>31</sup> We contribute to this collection by adding bond-level information on the timing and scope of default, that is, on missed or partial coupon and principal payments as well as the restructuring terms. We also expand that dataset forward, by 50 years, adding monthly price quotations for external sovereign bonds trading on the LSE from 1930 to 1980, as provided by The Economist and the Financial Times.

Importantly, for the interwar period and post-WW2, we are the first to code and integrate into the analysis a large dataset of prices and returns for external sovereign bonds on the NYSE, which became the main trading platform for foreign sovereigns after 1914. Specifically, we coded NYSE sovereign bond price data from the Bank and Quotation Section of the Commercial Financial Chronicle (1905–27 and 1954– 78) and from the Bank and Quotation Record (from 1927–54). Taken together, the historical bond price sample spans the period from 1815 until 1980 and includes more than 900 external sovereign bonds.

For the modern (post-1990) period, we build on the extensive emerging market bond price collection by JP Morgan as part of their EMBI Global indices. EMBI data have been very widely used in the sovereign

> 31 Their dataset is hosted on the website of the International Center for Finance at Yale. A large literature has used their data and, more generally, data from the Investor’ Monthly Manual, for example, Ferguson and Schularick (2006), Mauro, Sussman, and Yafeh (2002), or Mitchener and Weidenmier (2010).

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debt literature, but unlike previous authors, we do not rely on the off-the-shelf country-level EMBI series but exploit the rich microdata on individual bonds that underlie the aggregate index. We focus on bonds that appear in the broadest of their indices, the EMBI Global, which are USD instruments from low- and middle-income countries with a minimum issue size of US$500 million and “easily accessible and verifiable daily prices either from an inter-dealer broker or a certified JP Morgan source” (see JP Morgan [1999] for details).

A main advantage of using the bond-by-bond EMBI data compared to the standard country-level indices is that we get a cleaner, more homogenous sample that is consistent with our historical time series, facilitating long-run comparisons. Scrutinizing and winnowing the sample is important for our purposes because the EMBI includes many _non_ -sovereign, _non-_ USD (or UK pound) instruments, such as bonds issued by large public banks, as well as local-currency bonds.

Specifically, we drop all EMBI bonds issued by public companies and other sub-sovereign bonds guaranteed by the government. Furthermore, we exclude local-currency bonds, as well as a few dozen bonds in international currencies other than the USD or GBP, such as the French or Swiss franc. The resulting dataset includes more than 600 external sovereign bonds from the EMBI. Some bonds have prices as early as 1990, but the sample becomes representative only from 1995 onward when more than 40 Brady bonds were actively traded. We therefore show results for the modern period starting in 1995.

Our merged (historical plus modern) bond pricing sample thus covers 1,552 foreign-currency sovereign bonds issued by 91 countries.<sup>32</sup> The coverage and granularity of this global dataset close to that compiled for individual advanced countries.<sup>33</sup> For the United States, the Chicago-based CRSP Database provides monthly instrument-level data on US Treasuries back to 1925. For England, Ellison and Scott (2020) gathered granular data on prices and issuance patterns of UK government debt 1694-2017.

When combining the bond price dataset with our archive on missed payments and debt restructurings, as described in Section 2, we match at the bond level. However, we do not have prices for all of the 1,134 bonds for which we computed haircuts, because some of the restructured bonds were not regularly traded

> 32 Of these, 70 defaulted on their external debt at some point between 1814 and 2016, namely, Algeria, Angola, Argentina, Austria/Austria-Hungary, Belize, Bolivia, Brazil, Bulgaria, Cameroon, Chile, China, Colombia, Costa Rica, Côte d'Ivoire, Croatia, Cuba, Czech Republic/Czechoslovakia, Dominican Republic, Ecuador, t Egypt, El Salvador, Estonia, Ethiopia, Finland, Gabon, Germany, Ghana, Greece, Guatemala, Haiti, Honduras, Hungary, Indonesia, Iraq, Italy, Jamaica, Japan, Jordan, Kazakhstan, Kenya, Latvia, Lithuania, Mexico, Morocco, Nicaragua, Nigeria, Pakistan, Panama, Paraguay, Peru, the Philippines, Poland, Portugal, Romania, Russia, Senegal, South Africa, Spain, Sri Lanka, Tanzania, Thailand, Trinidad and Tobago, Turkey/Ottoman Empire, Ukraine, Uruguay, Venezuela, Vietnam, Yugoslavia/Serbia, Zambia, and Zimbabwe. The remaining 21 countries never defaulted on privately-held external debt since 1815, namely Armenia, Australia, Azerbaijan, Belarus, Belgium, Canada, Denmark, France, Georgia, Ireland, Lebanon, Malaysia, Mongolia, Namibia, the Netherlands, New Zealand, Norway, the Slovak Republic, South Korea, Sweden, and Switzerland.

> 33 See also Maggiori, Neiman, and Schreger (2020), who use granular data on hundreds of thousands of financial instruments, including sovereign bonds, to examine the choice of issuance currency.

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and quoted in New York or London. Similarly, we note that only a subset of the 1,400 bonds for which we have pricing data were in default at some point. Many bonds, therefore, appear in the bond price dataset but not in our default and haircut dataset and vice versa.

Table 2 and Figure 3 provide an overview the data coverage. This is complemented by Figure B3 in the Appendix, which shows the data coverage by country. The apparent gaps in the sovereign bond price and return data series can largely be explained by the fact that countries tapped New York and London markets irregularly. In the first half of the 19th century (after Waterloo), less than 30 countries had sovereign bonds traded in London. The sample grows markedly after 1850, especially between 1870 and 1913, a period that has been termed the “first era of financial globalization” and is characterized by large-scale capital flows from London to periphery countries. After WW1, New York joined London as the second dominant financial center of the world, and our sample continues to grow, reaching the first peak in the late 1920s. By 1929, after an extended issuance boom (see, for instance, Winkler (1933) or Wynne [1951]), our sample covers more than 80% of all independent sovereigns. Specifically, more than 300 sovereign bonds by more than 50 sovereigns were actively traded in London and New York (as of 1929 there were 63 countries worldwide).

Table 2: The bond pricing database: Countries and bonds included

|<br>|**Total**<br>**sample**<br>|1815-1869|1870-1913|**By era**<br>1914-1945|1946-1980|1989-2016|
|---|---|---|---|---|---|---|
|Number of countries covered|91|30|45|52|43|67|
|Share of countries covered|70.5%|73.2%|88.2%|85.2%|35.8%|51.9%|
|Pricing observations|266,134|12,070|74,884|78,257|44,679|56,244|
|Number of active bonds|1,552|140|437|507|313|641|
|... issued in British pounds|635|140|430|335|108|0|
|....issued in US dollars|917|0|7|172|204|641|
|Avg. maturity of bonds|27|33|41|40|33|16|
|Average coupon (nominal)|5.8|5.1|4.7|4.9|5.2|7.0|
|Average amount issued<br>(nominal, in m USD)|739|29|35|35|37|1,738|

_Note_ : This table shows the evolution of our sample since 1815. The coverage gap between 1980 and 1990 is explained by the fact that only very few sovereigns had outstanding foreign-currency bonds at the time (see text, Figure 3 and Appendix B4). In the 1970s and 1980s, most international lending took the form of bank loans rather than bonds, so that the bond market shrank considerably. The share of countries is given in percent of all independent countries worldwide. Average bond maturity is measured at issuance.

During the 1930s, the sample shrinks, for two very different reasons. The first reason has to do with data availability, as the Investor’s Monthly Manual ceased to be published. Thus, the most important pricing source for the London market was no longer available. As a replacement, we gathered price quotes from The Economist and the Financial Times after June 1930 and until the 1980s, but these two sources do not cover all bonds trading in London at the time. The second reason is the course of global economic and geopolitical developments. The Great Depression and WW2 were accompanied by widespread capital 18
account restrictions and a wave of banking crises and sovereign defaults after 1929. These events led to a sharp decline in cross-border lending worldwide (Reinhart et al. 2018). Moreover, securities of enemy countries or their allies were banned from trading on the LSE and NYSE after 1939. As a result, the number of traded bonds with monthly pricing information drops to less than 200.

After 1945, during the era of financial repression and capital controls under the Bretton Woods system, the sample declines further.<sup>34</sup> This era sees only little international private capital flows and bank lending overtakes bonds as the preferred vehicle of cross-border lending to sovereigns. As a result, between 1950 and 1990, only 25 countries issued foreign-currency bonds that were actively traded in London and New York, so our data covers a total of just 117 newly issued sovereign bonds in four decades. While sovereign bond placements stalled, the 1970s and early 1980s became the era of sovereign syndicated bank lending. Developing countries borrowed heavily from commercial banks primarily in the United States and Europe. This lending boom was followed by large-scale defaults on these debts. By the early 1980s, only a handful of countries still had outstanding bonds at the LSE or NYSE and these instruments were mostly long-maturity bonds issued in the 1930s and 1940s.

Figure 3: Bond price sample: Coverage across time <!-- Start of picture text --> 60 400<br>55<br>350<br>50<br>45 300<br>40<br>250<br>35<br>30 200<br>25<br>150<br>20<br>15 100<br>10<br>50<br>5<br>0 0<br>1815 1835 1855 1875 1895 1915 1935 1955 1975 1995 2015<br>Countries covered (left axis)<br>Active bonds outstanding (right axis)<br>Active bonds<br>Countries covered<br><!-- End of picture text --> _Note:_ The figure shows the coverage of our database by number of bonds (right axis) and countries (left axis, those with at least one active bond), for each year between 1815 and 2016. The sample includes only sovereign bonds issued in USD and GBP and traded in London and/or New York. Both lines are smoothed (5-year moving averages).

Bonds made a comeback only after the developing country debt crisis was resolved. A catalyst was the Brady Plan of the early 1990s, which involved restructuring deals that securitized the former bank loans. The newly issued sovereign bonds were traded at a discount. The resulting Brady bonds make up most of

> 34 See Ilzetzki, Reinhart, and Rogoff (2019) on a global measure of capital controls post 1946.

19
our sample in the 1990s. The reemergence of an active sovereign bond market subsequently encouraged more and more emerging markets to start issuing foreign-currency bonds in London and New York. By the early 2000s, bonds had regained their once dominant position in international sovereign lending. As a result, our sample grows rapidly and reaches a second peak in 2016, with more than 300 foreigncurrency sovereign bonds of 61 countries being actively traded. Further details on the sample and coverage are shown in Appendix B1.

Figure 4: Sovereign bonds in default, 1815-2016 <!-- Start of picture text --> 100<br>80<br>60<br>40<br>20<br>0<br>1815 1835 1855 1875 1895 1915 1935 1955 1975 1995 2015<br>Bonds in default (full or partial), share weighted by principal amounts<br>Not in default, share weighted by principal amounts<br>Share in default, in %<br>(weighted by principal amounts)<br><!-- End of picture text --> Figure 4 uses the full sample of bonds in the sample and combines it with the granular default data from Section 3. To compute shares in default, we use the bond’s principal for weighting purposes (issuance amount in USD). In line with Reinhart and Rogoff (2009), we find several main sovereign default waves in the historical data, with more than 40% of external bonds in default in the 1830s, the 1870s, and following the Great Depression. The default wave of the 1980s is not captured in the graph since it involved syndicated bank loans but not bonds. In the modern sample (post-1994), bond default ratios are low in historical comparison, with small peaks during the defaults of Russia in 1998 and Argentina in 2001. From 2006 to 2016, default rates remained close to zero, comparable to the pre-WW1 spell 190013.

# 4.2. Measuring bond returns

The ex-post nominal return for bond _i_ of country _j_ in month _m_ is driven by two main components: price changes and coupon payments. We calculate monthly total bond returns as follows: ii,jj,tt RR =<sup>NNii,jj,mm+ CCii,jj,mm</sup> −1 (2) ii,jj,mm where is the price of bond in month RR and NNii,jj,mm−1 are coupon payments. As is standard practice, coupon payments are considered as accrued interest, meaning that they are equally distributed over the ii,jj,mm ii,jj,mm NN ii mm CC coupon payment period. For example, in the case of quarterly coupons we assume equal payouts in each 20
of the three months. To calculate , we measure missed or partial coupon payments based on our newly collected bond-level dataset on default and restructuring outcomes (see Appendix B2). Appendix ii,jj,mm CC B2 also explains how we account for bond haircuts when calculating , that is, how we deal with exchanges of old into new bonds at a loss. In a nutshell, to compute returns in restructuring months, we ii,jj,mm NN combine the old defaulted bonds and the new instruments that creditors receive in the exchange, with the implicit assumption that creditors keep the newly restructured bond in the portfolio. We then account for the share of debt written off (face value debt reductions, if any) as well as potential cash payments that are made in the wake of a restructuring (including for the settlement of past arrears). In case the restructuring only involves a rescheduling of maturities but no face value debt reduction (sometimes called “debt reprofiling”), the write-off is zero, while the change in maturities should be reflected in the secondary market price of the new bond. This also implies that the exact NPV haircut estimation approach chosen (see Section 3) is not decisive for the computation of the returns series. In fact, the haircut estimate is a snapshot at one point in time, while returns are measured continuously on a monthly level. Ultimately, the key default-related variable that matters for the returns is missed coupons, since much of the returns come from interest payments and if these are not made, total returns drop. We do not account for transaction fees or taxes (See Appendices B2 and B5 for further details).

We use _real_ ex-post returns as the baseline measure, although we show results for nominal returns as well. By definition, all bonds in the sample are denominated in GBP or USD, so we need historical inflation data for the United Kingdom and the United States to compute real returns. For this purpose, we rely on the historical inflation indices provided by the Bank of England (for GBP bonds) and by the US Bureau of Labor Statistics (for USD bonds). For a USD bond, the monthly inflation rate is measured as U = U U U , so that the real ex-post return for this USD bond is given by ,mm = ππ ,mm U . A comparable process applies to UK bonds.,mm−1 ,mm−1<sup>35</sup> ii,jj,mm �CCNNCC −CCNNCC �/CCNNCC rr jj,ii,mm ,mm RR −ππ To arrive at yearly global portfolio returns,<sup>36</sup> we compute the monthly weighted global average across all bonds actively traded in month _t_ .

> 35 Appendix B5.5 shows that the results are similar when using inflation rates 12 months ahead.

> 36 Our results are similar when comparing bond prices at the beginning and end of a year (adding all within-year coupon payments) instead of annual averaging.

21
(1+R )-1 ~~—~~ R (1+R ) Tl] (4+R <u>)</u>
is the risk-free rate, denominated in the same currency as bond _i_ . Appendix A provides the sources for these risk-free rates (total return series on UK and US bonds). For completeness, we also compute excess returns vis-à-vis UK or US bills, which is useful when comparing the risk-return properties of external sovereign bonds with those of other asset classes (Section 6).

Further methodological details are discussed in Appendixes B2 and B3, including a discussion on how we deal with historical bond features such as sinking funds.

# 4.3. Main results on bond returns

Table 3 summarizes our main results. The table shows average yearly sovereign bond returns for our global portfolio of foreign-currency bonds over 200 years. Henceforth, we do not show returns for the period 1974 to 1994 due to a lack of representative bond pricing data in the 1970s and 1980s.<sup>39</sup> This means that the time series for the global portfolio ends in 1973 and starts again in 1995. Appendix B5 shows a number of robustness checks, such as on selection (survivorship) bias and the inflation series used.

Table 3: Returns on a global portfolio of external sovereign bonds, 1815-2016

||Re<br>|al Retur<br>|n<br> <br>|Nomi<br>|nal Ret<br>|urn<br> <br>|Above<br>US/UK|<br> <br>Sharpe<br>rti|
|---|---|---|---|---|---|---|---|---|
||Arithm.<br>Mean|Geom.<br>Mean|<br> <br>SD|Arithm.<br>Mean|Geom.<br>Mean|<br> <br>SD|<br>gov.<br>Bonds|<br> <br> <br>ao|
|**Full sample**, 1815-2016, yearly|6.85|5.78|15.03|<br>7.99|7.13|13.69|<br>4.29|0.32|
|... without world wars|6.99|5.99|14.50|7.69|6.87|13.21|<br>3.94|0.30|
|**By era**, yearly|||||||||
|1815-1869|7.10|5.66|17.28|<br>6.90|5.87|14.84|<br>2.96|0.23|
|1870-1914|6.28|5.97|8.01|6.18|5.91|7.45|<br>3.70|0.48|
|1915-1945|6.01|4.29|19.91|<br>7.12|6.00|16.19|<br>2.33|0.16|
|1946-1973|5.85|4.91|14.52|<br>10.15|9.19|15.12|<br>8.07|0.52|
|1995-2016|9.89|8.96|14.29|<br>12.40|11.41|14.97|<br>6.26|0.33|
|Monthly returns, full sample|0.54|0.47|3.74|0.65|0.58|3.66|<br>0.35|9.33|

_Note:_ Table 3 shows average ex-post investor returns in our total sample of 91 countries and 200 years, as well as for different subsamples. The country composition is changing over time (see Appendix B1). All returns are yearly averages, except for the last line, which shows a monthly frequency. Returns and standard deviations shown are based on a global portfolio that includes all outstanding foreign-currency sovereign bonds at each point in time. Excess returns and Sharpe ratios are computed using US/UK bonds as benchmark.

In the full sample from 1815 to 2016, foreign-currency bonds show an annual ex-post real return of 6.85%, including spells of turmoil due to defaults, wars, and revolutions. The average is slightly higher (7%)

> 39 As we explain in Section 3.1. and in Appendix B1, the 1970s and 1980s were a period dominated by syndicated bank lending to sovereigns. Barely any sovereign bonds were issued abroad. As a result, the number of countries with actively traded bonds dropped to fewer than 10 in the 1980s, making the global portfolio unrepresentative.

23
when dropping WW1 and WW2 (1914–18 and 1939–45). Because of the disappearance of new bond financing in the 1970s and 1980s, this sample omits the encompassing debt crisis in emerging and developing countries in the 1980s, when commercial bank loans (not bonds) occupied the center stage of the unfolding default drama. The data that does exist suggests that, during the 1980s, ex-post investor returns, were well below the historical average (see Appendix B4 for details on the 1970s and 1980s).

Nominal returns exceed real ones in the full sample, but this is driven by the period after WW1. In the 19th century, real returns tend to be higher than nominal returns, due to the many deflationary spells, including the “Great Deflation” between 1870 and 1890. The geometric total real return is lower, as usual, with an average of 5.8%. This number represents the annual compounded return of a portfolio that remained invested for almost two centuries.

Turning to subsamples, the two main eras of financial globalization (1870–1914 and 1995–2016) stand out. The period 1870–1914 shows an average real annual return of 6.3% per year, coupled with low volatility (the standard deviation is 8%), while the modern sample shows real annual returns of almost 10%, which is above the historical average. The early 19th century sees high average real returns of about 7%, but also a high return volatility. The interwar years, with an exceptionally high incidence of defaults, show the worst risk-return ratio, with lower-than-average real returns of 6.01% (the geometric return is just 4.3%) and a standard deviation of 19.9%. The returns are lowest in the three decades following WW2, mostly due to the fact that many bonds that went into default in the 1930s continued to be nonperforming for decades. It took until the 1980s to settle all the defaults of the 1930s and 1940s, with a total of 41 restructurings.<sup>40</sup> At the same time, barely any bond issuances occurred, so that the averages for this era are biased downward due to selection effects.

Since our sample is unbalanced, we explore the issue of survival bias and sample composition in Appendix B5.1, by focusing on 15 countries for which we have more than 100 years of data each, resulting in a more balanced sample. The returns for these 15 countries are similar to our baseline numbers that build on all 91 countries, some of which only have data for a few years. This alleviates concerns that our main finding is biased due to sample issues.

The observed returns can mainly be attributed to coupon payments (gains from interest) rather than price changes (capital gains). Around 70%, or 5.6 percentage points, of the nominal yearly return of 8.0% over the past 200 years is due to coupon payments. Coupons are the main driver of returns in each decade, roughly contributing between 4 and 8 percentage points to the ex-post nominal returns. Appendix B5.2. provides further details on coupon versus price effects.

> 40 At the end of World War 2, there were still only 69 sovereign nations.

24
Figure 5 explores the distribution of returns in our global bond portfolio. We examine the distribution because the standard deviation can understate the degree of risk due to a skewed distribution with fat tails. The return distribution does not look overly skewed. Despite some positive and negative outliers, the plot for the full sample (Panel A) is roughly in line with a normal distribution (which is also true for the monthly data). We nevertheless compute adjusted Sharpe ratios, to account for volatility, skewness, and kurtosis (the differences are small; see, for example, Section 6).

Figure 5: Distribution of bond returns and bond prices, 1815-2016 Panel A: Bond returns - full sample Panel B: Bond returns - (real, arithmetic average total returns) default vs non-default spells <!-- Start of picture text --> 15 Mean: 6.85Median: 6.58 30 Non-default years: Mean: 6.05<br>13 Scewness: 0.26 Median: 4.85<br>Skewness: 1.09<br>25<br>Default years:<br>10 Mean: 2.37<br>20 Median: 1.98<br>Skewness: 0.17<br>8<br>15<br>5 10<br>3 5<br>0<br>0<br>-40 -20 0 20 40 60 -100 0 100<br>Total returns (yearly, real, arithmetic avg.)<br>Total returns (yearly, real, arithmetic avg.)<br>normal distribution Non-default years Default years<br>Panel C: Bond prices – default vs non-default spells<br>20 Non-default years:<br>Mean: 88.47<br>Median: 95.00<br>Skewness: -1.14<br>15 Default years:<br>Mean: 35.09<br>Median: 25.00<br>Skewness: 0.97<br>10<br>5<br>0<br>0 50 100 150<br>Bond prices (end of year)<br>Non-default years Default years<br>Percent Percent<br>Percent<br><!-- End of picture text --> _Notes:_ This upper part of this figure shows the distribution of yearly real returns. Panel A uses aggregate yearly returns based on the global sovereign bond portfolio. Panel B uses bond-level data and distinguishes between years in default and non-default years. Panel C shows the distribution of bond prices as reported in the primary sources (mixing USD and British Pound prices) for default and non-default years and also using bond-level data.

In default years (Panel B), the distribution differs markedly, with a lower average real return and much fatter tails. However, the coefficient for skewness remains close to zero, suggesting that years of investor losses and years of recoveries balance each other out in normal times and in crisis times (see also Section 4 on bond performance following a default). Furthermore, Panel C shows that there is much more skew 25
when looking at bond prices only. During default, the average bond price is just 35 USD or GBP, with a strong left skew. In non-default years the average price is 89 and the distribution has a right skew.

To allow for different investment horizons, we next turn to holding period returns (HPRs). Table 4 shows average HPRs across years and countries (for completeness, we start on a quarterly basis). After 10 years, the mean HPR in our full sample is 94%, with a median of 84.7%. The upper bucket (75th percentile) shows a 126.5% real return over 10 years, while the lower bucket (25th percentile) shows a cumulative return of 59.5%. We also show geometric and arithmetic means per year. Over time, the geometric mean decreases due to the occurrence of defaults. In contrast, the returns using arithmetic averaging remain in the range of 6 to 7% per year.

Table 4: Holding period returns on a global portfolio of external sovereign bonds, 1815-2016

||Qua<br>|rterl<br>|y (Q1-<br>|Q4)<br>|Yea<br>|rly (yea<br>|rs 1-1<br>|0)<br>|||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
||Q1|Q2|Q3|Q4|1|2|3|4|5|6|7|8|9|10|
|Mean (arithmetic,<br>cumulative)|2.7|3.9|5.3|6.8|6.8|14.7|22.9|31.3|40.8|50.3|60.3|70.8|81.8|<br>94|
|p75|6.3|8.6|12.6|14.4|14.4|27.3|41|55.8|64.7|77.4|85.3|100.1|110.6|126.5|
|Median|2.7|3.9|4.4|6.6|6.6|12.4|18|25.6|32.3|40.9|51.3|61.7|71.5|<br>84.7|
|p25|-0.3|-1.2|-1.5|-1.5|-1.5|1.8|3.7|6.1|14.5|21.5|31.2|39.8|48.5|<br>59.5|
|Mean (arithmetic,<br>avg. per period)|2.7|2|1.8|1.7|6.8|6.9|6.9|7|7.1|7.2|7.4|7.4|7.4|<br>7.5|
|Mean (geometric,<br>annualized)|2.7|1.8|1.6|1.5|6.8|6.5|6.3|6.2|6.3|6.3|6.4|6.5|6.5|<br>6.5|

_Note:_ This table shows holding periods ranging from Q1 to year 10. The average geometric mean is reported for quarterly holding periods on a quarterly basis, that is, it gives the average, real compounded return for one quarter. For the annual holding periods, the geometric mean states the average, annualized return for the specific holding period. All return statistics are based on a global portfolio of outstanding foreign-currency sovereign bonds.

Figure 6 zooms in on the subsample of the worst-performing bonds, in which the repudiation cases figure prominently. We calculate the share of bonds with negative real compounded returns after different holding periods. In the full sample, in year one, more than 26% of the observations see negative returns, and this drops to below 20% in year 10 (Panel A). Moreover, there are about 10% of observations with substantial losses, showing a negative return of -30% or worse, as well as a small but growing share of bonds with returns between -30% and -60%. Observations in this bottom bin are dominated by spells after the Great Depression and around WW2, for example, in many Communist countries (China, Russia, and Eastern Europe), which saw a large initial collapse in bond prices and defaults that persisted for decades.

In the modern (post-1995) period, the share of bonds with negative returns is much lower than in the historical sample (Panel B), partially reflecting the relative absence of full repudiation cases. After three years, only about 7% of the country observations remain in negative territory. The share with very low 26
returns (-30% to -60%) is below 1% initially and decreases to zero percent which includes the long and severe Argentine default, as well as the years following the financial crisis of 2007–08. Thus, over the decades since the crisis of the 1980s, only a small subgroup of bonds saw protracted losses.

Figure 6: The bottom bin: Share of bonds with negative returns Panel A: Full sample, 1815-2016 <!-- Start of picture text --> 30<br>20<br>10<br>0<br>1 2 3 4 5 6 7 8 9 10<br>Holding period in years<br>Share of bonds with returns < 0%<br>Share of bonds with returns < -30%<br>Share of bonds with returns < -60%<br>Panel B: Modern sample, 1995-2016<br>30<br>20<br>10<br>0<br>1 2 3 4 5 6 7 8 9 10<br>Holding period in years<br>Share of bonds with returns < 0%<br>Share of bonds with returns < -30%<br>Share of bonds with returns < -60%<br>Share of bonds in %<br>Share of bonds in %<br><!-- End of picture text --> _Note:_ This figure shows the share of country bond portfolios with a negative, annual real return over different holding periods (years 1 to 10). Panel A includes all years, while Panel B focuses on the modern (post-1995) sample.

# 4.4.  Returns by country: The role of credit history and risk

This section shows bond returns for individual countries and by country groups, in particular for the group of serial defaulters. The returns by country or group are averaged across all active bonds in the subsample and volume-weighted, analogous to the construction of the global portfolio. We also show excess returns above “risk-free” bonds as described above, using UK and US government bonds as the benchmarks for bonds issued in GBP and USD, respectively.

27
We start with a group of 51 “serial defaulters.” These are countries that have defaulted on their external debt at least twice since 1815 (or independence).<sup>41</sup> Appendix B5.4 shows that the results are similar when using a stricter definition of serial defaulters, that is, for countries with at least three or at least four defaults. The second group of 40 countries (“Others”) includes non-defaulters and one-time defaulters.<sup>42</sup> The default data are from Reinhart and Rogoff (2009), updated by Reinhart and Trebesch (2016) and here.

Table 5: Bond returns by country group and era

||Arithmetic<br>mean<br>(annual)|<br>Geometric<br>mean<br>(annual)|SD|Excess return<br>(mean, above<br>UK/US bonds)|
|---|---|---|---|---|
|Total Sample (1815-2016)|||||
|Serial defaulters<br>|7.1<br>|5.8<br>|16.8<br>|4.6<br>|
|Other countries with ext. bonds|5.6|5.1|10.4|3.4|
|UK/US government bonds|2.9|2.5|9.3||
|Early 19th Century (1815-1869)|||||
|Serial defaulters<br>|7.0<br>|5.5<br>|17.8<br>|2.9<br>|
|Other countries with ext. bonds|5.8|5.4|10.1|1.8|
|UK government bonds|5.1|4.6|10.2||
|Pre-WW1 (1870-1913)|||||
|Serial defaulters|6.6|6.2|9.4|4.1|
|Other countries with ext. bonds<br>|5.3<br>|5.2<br>|4.0<br>|2.6|
|UK government bonds|2.5|2.5|3.9||
|Interwar (1920-1937)|||||
|Serial defaulters<br>|6.8|4.8|21.2|-2.8|
|Other countries with ext. bonds|10.5|9.4|16.5|1.0|
|US government bonds|6.5|5.9|11.5||
|Today (1995-2016)|||||
|Serial defaulters<br>|9.9|9.0|14.5|6.3|
|Other countries with ext. bonds|7.4|7.1|9.3|4.9|
|US government bonds|4.0|3.7|8.2||

_Notes:_ This table shows summary statistics of yearly total real returns on foreign-currency sovereign bonds across 200 years for different country groups. Serial defaulters had two or more external defaults or were in default for a very long time (their share of years in default since independence is above the sample median of 20%). Other countries are those that never defaulted or only for a brief period (share of years in default below the median). Excess returns above UK/US bonds are computed at the bond level.

Table 5 shows summary statistics for the three groups, (i) serial defaulters, (ii) “other” sovereigns that issued debt in USD and GBP abroad, and (iii) “risk-free” US or UK long-term government bonds. The

> 41 Specifically, the group includes Argentina, Austria/Austria-Hungary, Belize, Bolivia, Brazil, Bulgaria, Chile, China, Colombia, Costa Rica, Cote d'Ivoire, Cuba, Czech Republic/Czechoslovakia, Dominican Republic, Ecuador, Egypt, El Salvador, Gabon, Germany, Ghana, Greece, Guatemala, Haiti, Honduras, Hungary, Indonesia, Jamaica, Kazakhstan, Mexico, Morocco, Nicaragua, Nigeria, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Romania, Russia, Senegal, Serbia/ Yugoslavia, South Africa, Spain, Sri Lanka, Turkey/Ottoman Empire, Ukraine, Uruguay, Venezuela, and Zimbabwe.

> 42 Algeria, Angola, Armenia, Australia, Azerbaijan, Belarus, Belgium, Cameroon, Canada, Croatia, Denmark, Estonia, Ethiopia, Finland, France, Georgia, Iraq, Ireland, Italy, Japan, Jordan, Kenya, Latvia, Lebanon, Lithuania, Malaysia, Mongolia, Namibia, Netherlands, New Zealand, Norway, Slovak Republic, South Korea, Sweden, Switzerland, Tanzania, Thailand, Trinidad and Tobago, Vietnam, Zambia.

28
UK/US series is spliced, by combining the real yearly returns on long-term UK gilts until 1918 with the return series on 10-year US Treasuries for the subsequent 100 years (see Appendix A for sources). We switch to US bonds after WW1 because New York overtakes London as the world’s main financial center during the interwar years, but the series looks similar if we consider both series over the entire 200-year span and simply use the average of US and UK long-term government bond returns. As a complement, Figure 7 shows 10-year moving average returns for each of the groups since 1815.

Figure 7: Trends in sovereign bond returns, 1815-2016 <!-- Start of picture text --> Panel A: Bonds of serial defaulters vs. UK/US bonds<br>15<br>10<br>5<br>0<br>-5<br>-10<br>1815 1835 1855 1875 1895 1915 1935 1955 1975 1995 2015<br>UK/US 10y bonds Serial defaulters<br><!-- End of picture text --> Panel B: Other external sovereign bonds vs. UK/US bonds <!-- Start of picture text --> 15<br>10<br>5<br>0<br>-5<br>-10<br>1815 1835 1855 1875 1895 1915 1935 1955 1975 1995 2015<br>UK/US 10y bonds All others<br><!-- End of picture text --> Note: This figure shows time series of 10-year (-5/+5) moving-average returns on external sovereign bonds across 200 years and on UK/US bonds (with 10-year maturity or more, see Appendix). The shaded bars represent WW1 and WW2. The country groups are summarized in the text above. Serial defaulters are those with two or more external defaults or with protracted defaults.

The main takeaway from Table 5 and Figure 7 is that sovereign bonds of serial defaulters provided significantly higher returns compared with UK/US government bonds as well as compared with “other” periphery countries that have never defaulted, or only briefly. Serial defaulters show higher excess returns in the full sample and in most sub-eras, except for the interwar years, when bonds of center countries perform better. Furthermore, Panel B in Figure 7 confirms that bonds of “other” periphery sovereigns have higher returns than UK/US bonds, except in the first half of the 19th century. This pecking order is 29
also observable for the standard deviation of returns, which is highest for serial defaulters (in all eras), followed by that of “other” periphery sovereigns and that of UK/US bonds. The findings suggest that investors are compensated (primarily via rich coupons) for the incremental risk they take when holding bonds of volatile countries with a bad credit history.

Table 6: Sovereign bond returns by country

|Country|R|eal retu|rn|Geo|metric r|eturn|<sup>Exces</sup><br>return|<sup>s</sup><br> <br>SD of<br>real<br>returns|<br>Sharpe<br>ratio|<br>Skew.<br>of real<br>return|<br> <br> <br>Years<br>with<br>bond|
|---|---|---|---|---|---|---|---|---|---|---|---|
||Full<br>sample|<br>1820-<br>1973|<br>1994-<br>2016|Full<br>sample|<br>1820-<br>1973|<br>1994-<br>2016|Full<br>sample|<br>Full<br>sample|<br>Full<br>sample|<br>Full<br>sampl|<br>returns<br>e|
|Cote d'Ivoire°|15.9||15.9|13||13|16.2|26.9|0.59|0.98|14|
|Ecuador|15.5|9.3|27.5|6.8|4.1|12.2|13.2|53.9|0.24|3.38|56|
|Switzerland*|14.8|14.8||14|14||9|15.2|0.54|2.27|10|
|Pakistan°|14.6||14.6|8.6||8.6|15.7|41.5|0.37|1.87|13|
|Estonia*|14|14||4.8|4.8||13.4|48.2|0.26|1.34|33|
|Nigeria°|13.5||13.5|11.9||11.9|12.6|20|0.64|1.13|17|
|Ukraine°|12.8||12.8|6.8||6.8|13.5|37.2|0.35|1.06|15|
|Iraq°|12.5||12.5|8.5||8.5|13.9|32.6|0.41|1.28|10|
|Finland<br>(interwar)*|11.9|11.9||9.1|9.1||9.7|26.9|0.38|1.48|39|
|Costa Rica|10.4|10.9|1.5|5.6|5.8|1.2|8.6|34.6|0.26|1.12|91|
|Serbia/Yugoslavia|10.2|10.6|7.5|5.1|5|5.2|9.7|33.3|0.28|0.8|70|
|Poland|9.9|11.3|7.3|3.8|2.2|7|9.6|37.8|0.25|1.57|66|
|Mexico|9.8|10.1|8.1||5.8|7.9|8.1|31.2|0.25|2.8|146|
|Germany*|9.2|9.2||4.7|4.7||8.2|37.2|0.21|3.18|65|
|France (interwar)*|9.1|9.1||7.9|7.9||8.1|16.1|0.52|0.01|31|
|Philippines°|9.1||9.1|8.7||8.7|9|10.1|0.91|0.18|20|
|Venezuela|8.9|7.1|14.6|6.3|4.7|11.3|6.5|24|0.28|0.41|90|
|El Salvador|8.7|9.2|6.5|5.1|5.1|5.5|7.7|29.8|0.24|2.09|70|
|Czechoslovakia*|8.7|8.7||4.9|4.9||8.4|26.1|0.31|0.33|44|
|Brazil|8.3|8|10.1||6.1|9|6.2|20|0.33|1.15|145|
|Dominican<br>Republic|8.3|8.1|8.9|3.7|2.9|6|6.9|31.6|0.22|0.9|56|
|Turkey|8.3|8.3|8.1|5.3|4.8|7.5|5.8|24.3|0.26|0.24|87|
|Colombia|8.3|8.3|8.1|4.6|4.1|7.7|6.4|28.7|0.24|1.02|126|
|Portugal*|8.3|8.3||6.3|6.3||5.4|20|0.32|0.24|114|
|Guatemala|8.1|8.4|3.5|4.8|4.9|3.4|5.1|28.1|0.19|1.57|77|
|Argentina|8|7.3|12.3||5.9|6.3|5.8|21.3|0.29|1.04|137|
|Greece*|7.8|7.8||4.3|4.3||5.6|28|0.21|0.91|128|
|Haiti*|7.8|7.8||6.5|6.5||7.2|16.6|0.45|0.24|22|
|Morocco|7.7|3.7|8.9|7.3|3.7|8.4|6.9|9.7|0.74|0.66|18|
|Zimbabwe*|7.6|7.6||7.2|7.2||4.5|9.5|0.54|0.66|17|
|Nicaragua*|7.6|7.6||6.7|6.7||4.4|13.9|0.37|0.04|38|
|Uruguay|7.5|7.7|5.8|5.7|6|3.7|6.2|18.9|0.34|0.2|114|

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|Japan*|7.4|7.4||5.9|5.9||5.6|19.9|0.29|2.82|99|
|---|---|---|---|---|---|---|---|---|---|---|---|
|Lebanon°|7.3||7.3|7.1||7.1|7.9|6.8|1.04|1.66|16|
|Panama|7.2|7.4|7.1|6.1|5.6|6.8|7.2|14.6|0.47|-0.67|46|
|Cuba*|7.1|7.1||5.8|5.8||6.2|17.2|0.38|1.35|72|
|Chile|7|7.3|4.3|4.8|4.9|4.2|5.1|20.5|0.26|0.71|150|
|Paraguay|6.9|7|5|2|1.9|4.9|3.7|34.6|0.11|1.64|57|
|Italy*|6.9|6.9||3.9|3.9||4.2|22.2|0.21|1.3|103|
|Netherlands*|6.5|6.5||6.4|6.4||3.1|5.1|0.88|-0.17|25|
|Indonesia°|6.4||6.4|5.6||5.6|7.3|13.6|0.51|0.69|12|
|Egypt|6.2|6.4|5.2|5.5|5.6|4.8|4.1|12.8|0.41|0.52|93|
|Sweden (pre-<br>WW2)*|6.1|6.1||5.3|5.3||2.7|13.7|0.32|3.26|66|
|Spain*|6|6||3.6|3.6||3.7|23.4|0.17|2.02|131|
|Bulgaria|6|4.6|10.9|0.8|-1.6|10|5.3|34.8|0.16|1.42|88|
|Hungary|5.8|5.9|5|2.7|2.5|4.6|4.6|26.1|0.18|1.36|107|
|Croatia°|5.7||5.7|5.4||5.4|6.2|8.6|0.74|1.27|11|
|Honduras|5.6|5.4|11.2|0.9|0.5|11.1|3|30.2|0.1|0.3|71|
|Russia|5.6|4.4|13.9|0.6|0.1|3.8|3.4|34.9|0.1|3.11|150|
|Denmark*|5.5|5.5||4.2|4.2||3.7|17.6|0.23|1.56|92|
|Malaysia°|5.2||5.2|5.2||5.2|4.9|4.5|1.06|0.64|10|
|Belgium*|5.2|5.2||4.1|4.1||4|16.2|0.25|2.45|83|
|Vietnam°|5.2||5.2|4.7||4.7|6.1|10.6|0.53|0.35|11|
|Peru|4.8|4.2|8.1|1.8|0.8|7.6|3.4|25.2|0.14|0.68|124|
|Norway*|4.6|4.6||3.7|3.7||3|14.7|0.22|1.46|93|
|Romania|4.4|16.8|3.2|3.8|3.8|3.1|14.8|79.6|0.18|4.88|78|
|Thailand|4.4|4.3|5.5|3.5|3.3|5.4|2.8|14.5|0.3|1.88|51|
|South Africa|4.3|3.9|5.7|3.8|3.4|5.4|2.6|10.4|0.39|1.5|89|
|Austria*|3.9|3.9||0.5|0.5||4.7|25.8|0.19|0.45|41|
|Ireland*|3.8|3.8||3.2|3.2||2.6|10.4|0.32|0.14|24|
|New Zealand*|3.7|3.7||3.3|3.3||1.6|9.8|0.29|1.7|93|
|Australia*|3.6|3.6||3|3||2|12|0.2|2.17|101|
|Canada*|3.1|3.1||2.7|2.7||1.5|9.3|0.3|1.71|96|
|Bolivia|2.5|1.5|7.3|-3.3|-5.3|7.2|-0.2|28.6|-0.01|-0.87|24|
|China|2.1|1.8|4.3|-1.1|-1.8|4.2|0.8|26.7|0.03|2.4|103|
|Cross-country<br>average<br>Cross-country|7.7|7.2|8.6|<br>5.1|4.2|6.8|<br>6.4|23.2|0.35|1.26|68|
|<br>median|7.4|7.3|7.4|<br>5|4.5|6.6|<br>5.8|21.3|0.29|1.15|70|

_Notes:_ The table shows average annual real ex-post returns by country, using arithmetic averages across all bonds outstanding at each point in time (country portfolios). Only countries with 10 or more years of data are included. For countries marked with (*) we only have historical bond returns (in the sample 1815-1973). This applies to many of today’s advanced economies which have stopped issuing external sovereign bonds in London or New York and borrow domestically instead. For countries marked with a circle (°) we only have returns in the modern sample (1995-2016). See Appendix B1 for a detailed overview of the years covered by country and on how we deal with country break-ups and country mergers when splicing the long-run country series (e.g., AustriaHungary, Ottoman Empire, Prussia-Germany).

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We next look at returns at the country level. Table 6 reports yearly real average returns for all countries for which we have more than 10 years of bond price data. Countries are ranked by average real returns. We also show the standard deviation of returns, average excess returns (above UK/US bonds), as well as the number of sovereign default events and the share of years in default. The country comparison is complicated by the fact that some countries, including most advanced countries, no longer issue government bonds in London or New York. Moreover, some countries only entered international capital markets recently and, for individual countries, there are years or even decades without pricing data, resulting in an unbalanced sample. Appendix B1 provides details on data coverage.

The results in Table 6 are consistent with our findings so far. Sovereign bonds of countries with a history of serial default tend to show higher returns, but also higher volatility.<sup>43</sup> The returns look surprisingly high even for countries that have defaulted multiple times and over long periods, such as Argentina, Brazil, Ecuador, Greece, Mexico, Ukraine, or Venezuela. These countries feature long-run excess returns between 4% and 12%. It is also remarkable that not a single country in Table 6 shows a negative arithmetic return, on average, and only two countries have negative excess returns (Bolivia and China).

Figure 8: Sovereign risk-return profiles: Returns and standard deviations, 1815-2016 <!-- Start of picture text --> 15 CIV ECU<br>CHE PAK<br>EST<br>NGA<br>IRQ UKR<br>FIN MEX<br>10 CRSR IB PO DEUL<br>VEN<br>FRA CZK<br>PHL<br>LBN ZMAWEPAN R NIC HC TUB IURY BRPR CHLJPNTURATARGITA CO GRC G SLVLTM DOMPRY<br>5 MYSNLDUS bondsHRVVNMEGYIDNSWEBELDNK ESPPERHUNAUTHND RUSBGR<br>ZAFIRLTHANOR ROU<br>AUS<br>NZL<br>CANUK bonds<br>CHNBOL<br>t-statistic:5.37<br>0<br>p-value:0.00<br>0 10 20 30 40 50<br>Standard deviation<br>Serial defaulters All others<br>Mean annual real return in %<br><!-- End of picture text --> _Notes:_ This figure plots real, average total returns on country-level portfolios of sovereign external bonds against their standard deviation. The data come from Table 6, covering countries with 10 years or more of bond price data.

To visualize the risk-return patterns, Figure 8 plots the mean annual real ex-post return against its standard deviation by country. The typical serial defaulter (marked in red) features average yearly returns in the range of 5%-10% and a standard deviation of returns above 20%. For other periphery countries (without a history of default), the average returns are lower, as is the standard deviation. We also show observations

> 43 In the current environment of near zero interest rates in advanced economies, coupons on many of the serial defaulters are in the 6-10 percent range.

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for “risk-free” UK and US government bonds (marked in blue) using the full 200-year series for both countries (the average yearly real return is 3.4% for US bonds and 4.1% for UK bonds, with standard deviations of 12% and 10%, respectively).

Figure 9 focuses on country credit histories and plots the average yearly real ex-post bond returns on the vertical axis against the total number of external sovereign default events (on private external debt) since 1815 on the horizontal axis, using the updated Reinhart and Rogoff (2009) default data. Similar to Figure 7, we find that bond returns increase in the riskiness of a country, as measured by the number of past defaults. In Appendix B7, we add to these results with a capital asset pricing model (CAPM) analysis. Serial defaulters have higher betas, as bond returns for these countries are more sensitive to US/UK stock market conditions.

Figure 9: The role of credit history: Returns and default frequency, by country, 1815-2016 <!-- Start of picture text --> CIV<br>15 ECU<br>CHE PAK<br>EST<br>NGA<br>IRQ UKR<br>FIN MEX<br>10 DEU POL SRB CRI<br>VEN<br>FRA CZK<br>PHL<br>LBN JPNITA PAN ZWEMARHTICUB PRTGRC COLSLVBRA URYPRYNICDOMGTM CHLARG<br>5 NLDSWEMYSDNKBEL VNMHRV HUN BGR RUSIDNHNDAUT EGY ESP PER TUR<br>NORIRL THA ROUZAF<br>US bondsNZLAUS<br>CAN<br>UK bonds CHN BOL<br>t-statistic:1.87<br>p-value:0.07<br>0<br>0 1 2 3 4 5 6 7 8 9 10 11<br>Number of external defaults<br>Serial defaulters All others<br>Mean annual real return in %<br><!-- End of picture text --> _Notes:_ This figure plots real, average total returns on country-level portfolios of sovereign external bonds against the total number of defaults since independence by that country on the horizontal axis. The data come from Table 6, covering countries with 10 years or more of bond price data. The default data from Reinhart and Rogoff (2009) and updated in Reinhart and Trebesch (2016).

# 4.5. Liquidity of the sovereign bond market over the past 200 years

This section gives a brief overview on sovereign bond market liquidity over 200 years, as proxied by bidask spreads (additional insights are provided in Appendix B6). To complement our main database of prices, haircuts and returns, we gathered a large additional dataset of bid and ask bond prices. The resulting bid-ask spread series cover all countries in our sample, but with some gaps, in particular in the first half of the 19th century (see Figure B3). In total, we could gather monthly, bond-level bid-ask spreads for 62% of our pricing sample (165,638 out of 266,134 observations). For historical bonds traded on the London 33
Stock Exchange, we follow Alquist (2010) and Chavaz and Flandreau (2017) and use the spread between the so-called “business done” and the “closing price” as a proxy for bid-ask spreads (71,108 observations). A Using these data, we compute s = 1 <u>,A</u> AA BBiiBB, ~~,~~ which represents the spread of bid and ask prices, 2 ~~�~~ PPii tt −PPii tt � ii,tt AA BBiiBB and , of bond _i_ in month rrs ss _t_ . We then compute an aggregate proxy for market liquidity by PPii,tt +PPii,tt BBiiBB AAssAA averaging the time series of bond-level, bid-ask spreads in our global portfolio on a monthly level as ii,tt ii,tt NN NN 1 follows: = ∑ s , where is the number of bonds _i_ trading in month _t_ .<sup>44</sup> NNtt MMssrrMMssttMMiiM iissiittMMtt NNtt ii=1 rrs ssii,tt NNtt Figure 10: Bid-ask spreads and total returns, 1870-2016 <!-- Start of picture text --> Panel A: 1870-1970<br><!-- End of picture text --> <!-- Start of picture text --> 10<br>Viennacrash of 1873Panic ArgentinadefaultBaringcrisisand of 1907Panic WorldWar I break-upsRussiandefault,Empire DrepressionGreat War IIWorld<br>5<br>0<br>Egypt<br>and<br>-5 Ottoman Empiredefault<br>1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970<br>Total real returns (monthly moving average, in %) Bid-ask spreads (monthly moving average, in %)<br><!-- End of picture text --> <!-- Start of picture text --> Panel B: 1995-2016<br>5 crisisAsian defaultRussiaand Argentina defaults,Brazil crisis bankruptcyLehmann announcementrestructuringGreek<br>LTCM crisis<br>0<br>-5<br>1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016<br>Total real returns (monthly moving average, in %) Bid-ask spreads (monthly moving average, in %)<br><!-- End of picture text --> _Note:_ This graph shows monthly bid-ask spreads (blue line) and total real returns (red shaded) for the global external bond portfolio. Both series are computed as 12-month moving-average (-6/+6). The shaded grey bars represent major crises, wars, and global shocks.

Figure 10 shows a 200-year time series of monthly bid-ask spreads and total returns for our global bond portfolio, with two key insights. First, the figure suggests that the liquidity of this asset class may importantly depend on global events, often originating or affecting the financial centers. Average bond liquidity declines markedly during global wars and financial crises, with bid-ask spreads spiking in the

> 44 The graph looks very similar when using weighted average bid-ask spreads (e.g. weighted by issuance amounts).

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initial months of the shock. WW2 had a particularly lasting impact, as market liquidity never fully recovered after 1945, with average bid-ask spreads remaining at a level far above those in the 1920s. Also, idiosyncratic crises affected aggregate market liquidity, for example the Ottoman and Egyptian defaults in the 1870s, the Russian default in 1998, or the Argentine defaults in the 1890s and early 2000s.

Second, total returns tend to be higher when bid-ask spreads are high, except for the first months of major shocks, when returns collapse while bid-ask spreads spike. On average, higher risk is associated with lower market liquidity. Appendix B6 confirms this using bond-level data, as average returns are significantly higher for less liquid bonds. The difference between the most liquid and least liquid bonds is large and statistically significant, especially in the historical sample, which is in line with Alquist (2010) and Chavaz and Flandreau (2017), who also find a substantial sovereign bond liquidity premium. An indepth analysis of sovereign bond market liquidity over the full 200 years is left for future research.

# **5. Investor performance around debt crises: Returns, defaults, and haircuts**

This section studies the link between bond returns, defaults, and haircuts, by combining the data on debt restructurings and creditor losses from Section 3 with those on bond prices and returns from Section 4.

Figure 11: Bond returns around sovereign defaults <!-- Start of picture text --> 175<br>Upper 75%<br>150<br>125 Average<br>cumulative<br>return<br>100<br>Lower 25%<br>75<br>50<br>-2 -1 t 1 2 3 4 5 6<br>Years around default<br>Start of holding period: 2 years before default<br>Cumulative total return index<br><!-- End of picture text --> _Note:_ This figure shows total cumulative returns on sovereign external bonds around default events, using real, monthly return data and taking into account losses due to missed coupons and haircuts. The total return series are normalized to one in year two (24 months) prior to the default. The bold black line shows the average across all defaulted bonds, while the dotted grey lines show upper and lower quartiles. We include all 92 default episodes for which we have sufficient pricing data before and after the default.

Figure 11 shows a time series of total returns around all the sovereign bond default events in our sample for which we have sufficient bond price data, in the run-up and the aftermath of default. These are 92 cases of a total of 161 sovereign bond defaults in the sample. (This exercise does not include the many defaults on bank loans for which no prices exist; see Figure 1.) The total cumulative return series is 35
indexed to two years (24 months) prior to the default. The bold black line shows the average across all bonds in the global portfolio, while the dotted grey lines show the upper and lower quartiles.

Figure 12: Returns around default: High vs. low haircut cases <!-- Start of picture text --> 175<br>150<br>Low/moderate<br>125 haircut defaults<br>(haircut <=42%)<br>100<br>75<br>High<br>haircut defaults<br>50 (haircut >42%)<br>-2 -1 t 1 2 3 4 5 6<br>Years around default<br>Low/moderate haircut defaults: total return index (year t-2=10<br>High haircut defaults: total return index (year t-2=100)<br>Cumulative total return index<br><!-- End of picture text --> As expected, sovereign bonds perform badly in the wake of a default event. The total cumulative return drops by about 15% initially and then stagnates for a few years, as debt crises tend to linger for nearly eight years, on average (Reinhart and Rogoff 2009). Investors who enter two years pre-default break even four years after the initial default date, on average, thus recouping the losses suffered with delay (this can be described as a U-shaped recovery). However, the variation is large. About 25% of all defaults (upper quartile) see barely any drop in total returns and investors increase their invested capital by 50% five years after the default, on average. In contrast, cases in the bottom 25% (lower quartile) do _not_ show a recovery; the pattern is L-shaped, as six years after the first default, investors are still in negative territory, far from breaking even. Almost all the defaults in the bottom quartile occur in the historical (pre-WW2) period, including defaults that took decades to settle. Since the 1990s, only the bond defaults of Argentina in 2001 and Ecuador in 2008 produced long-lasting creditor losses. Specifically, it took investors until 2016 to break even in Argentina (15 years) and about five years after Ecuador’s 2008 default. We also check holding period returns around default, using geometric instead of arithmetic average returns. The takeaway is similar to that in Figure 10, as investors entering two years prior to the default break even about five years after that event, meaning that the geometric average turns positive.

Figure 12 uses the same data but compares defaults with “high” and “low/moderate” haircuts. Defaults with a haircut above 42% (the median in this sample of 92 cases) are categorized as “high” haircut cases, while those with haircuts below 42% are categorized as “low/moderate.” The decline in investor returns is much smaller for low-haircut cases. On average, losses are recouped within three years after the initial default. In contrast, investors hit by deeper defaults wait more than six years, on average, to break even.

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To complement the aggregate picture, Appendix B8 shows cumulative total return series for 15 serial defaulters across different eras and world regions. One example is the debt crisis of Russia in 1998, which has been extensively studied (Duffie, Pederson, and Singleton 2003). It is well-known that bond prices collapsed after August 1998. What has received less attention, however, is that investors that held onto the defaulted bonds fully recovered the losses by 2001, after Russia exited its two-year default spell. Moreover, those staying invested in Russian foreign-currency bonds more than doubled their investment by 2003. On the opposite side of the spectrum are the bond “disasters,” like Russia after 1917 or Chile after the Great Depression. These cases illustrate how investors can be stuck in a default for decades, without bond price recovery or coupon payments.

To move beyond default episodes, Figure 13 compares annual average real ex-post returns on sovereign bonds (accounting for any losses due to defaults or haircuts) with the annual average haircuts, in the historical bond period (1815–1973) and the modern period (1995–2016). In the historical period, the average return on our global portfolio of external bonds was 6.5%. This compares to an average investor loss due to bond restructuring events (haircuts) of just 1.2% across years. In the modern period, average yearly real returns were 9.9% and average yearly haircuts were 0.8%. Over the past 200 years, returns on bonds in normal times offset losses during debt restructurings by a wide margin.

Figure 13: Returns vs. haircuts across years - historical and modern sample <!-- Start of picture text --> 10<br>Average<br>8 returns<br>(per year,<br>6 in %) Average haircut<br>(avg. losses per<br>4 year, in %)<br>2<br>0<br>Historical bond period Modern bond period<br>(1815-1973) (1995-2016)<br>Returns (real, avg. annual)<br>Losses (avg. annual haircut)<br>Return/haircut in %<br><!-- End of picture text --> _Note:_ This figure shows mean ex-post real returns on our global portfolio of foreign-currency sovereign bonds and compares it to the size of haircuts, both computed as yearly averages. Results are shown separately for the historical period (1815-1973, left panel) and for the modern period (1995-2016, right panel). To calculate average yearly haircuts, we consider only bond restructurings, thus dropping many restructurings of sovereign bank loans of the 1980s and 1990s.

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# **6. Comparison with other asset classes**

In this section, we compare the returns on external sovereign bonds from our new database with those of other major asset classes traded on UK and US capital markets. As in the previous analysis, we use a global portfolio time series of returns on all active foreign-currency sovereign bonds in the sample, weighted by debt amounts.

# 6.1 Data preamble

For comparison, we start with “risk-free” assets in financial centers. Specifically, we use returns on US and UK three-month Treasury _bills_ as well as US and UK long-term government _bonds_ . The time series of US and UK sovereign bonds and UK bills are gathered for the full 200-year sample. For bills, the data for the 19th century are approximated using commercial bills and related rates (US Treasury bill rates data start in 1919, and for the UK in 1900; see Appendix A). For stocks, we use a spliced total return index for the UK (FTSE) and for the US (S&P index), both from 1815 onward. To measure total returns on US corporate bonds, we use the S&P AAA Corporate Bond Price Index, which is available over 1900– 84 and combine this with the Bank of America US Corporate AAA Bond Index from 1985 onward. More details on the data sources are shown in Appendix A.

In addition to the US and UK series, we draw on the cross-country return database by Jordà et al. (2017), which covers 16 advanced countries over 1870–2015. We use their data to compute advanced country returns on domestic sovereign bonds as well as equities. Specifically, we first convert their local currency return series on bonds and equities into US dollars, using their exchange rate data. In a second step, we compute yearly average returns using equal weights for the 16 countries since 1870.

To compute excess returns, we use two approaches. First, we benchmark against monthly UK or US Treasury _bills_ , depending on the currency denomination of the respective bond or asset. Using bills facilitates the comparison across asset classes, including to long-term US/UK government bonds. Moreover, most of the earlier work on long-run returns uses bills as the benchmark, for example, Dimson, Marsh, and Staunton (2001) or Jordá et al. (2017). However, as an alternative, we also report excess returns above long-term UK or US _bonds_ , which has been our approach so far but is less standard in the literature comparing asset classes. In what follows, the resulting excess returns series are also used to compute commonly used metrics in this literature, such as standard deviations and Sharpe ratios.

# 6.2. Results on asset comparisons

Table 7 shows the results for the full sample, as well as for the modern period subsample (1995–2016). Figure 14 visualizes these findings, by focusing on average returns and their respective Sharpe ratios 38
across asset classes. Since the distribution of returns deviates slightly from the normal distribution, we also report adjusted Sharpe ratios in Table 7, with the results being similar.<sup>45</sup> Figure 14: Asset classes across 200 years: Risk and return Panel A: Full sample, 1815-2016 <!-- Start of picture text --> 8 Sharpe Ratio 0.4<br>4 Sov. 0.2<br>bonds<br>0 0.0<br>-4 Return -0.2<br>-8 -0.4<br>Corporate "Risk-free" Domestic UK equities Sovereign US equities Equity<br>bonds (US, gov. bonds sov. bonds (FTSE) bonds (S&P 500) portfolio<br>S&P index, (UK/US) (16 adv. (in USD or (16 adv.<br>since 1900) countries, GBP, global countries,<br>since 1870) portfolio) since 1870)<br>Return (real,yearly average; left axis)<br>Sharpe ratio (excess return/SD; right axis)<br>Panel B: Modern sample, 1995-2016<br>12 Return 0.8<br>Sharpe Ratio<br>0.6<br>8<br>0.4<br>4 Sov.<br>bonds<br>0.2<br>0 0.0<br>Corporate "Risk-free" Domestic UK equities US equities Equity Sovereign<br>bonds (US, gov. bonds sov. bonds (FTSE) (S&P 500) portfolio bonds<br>S&P index) (UK/US) (16 adv. (16 adv. (in USD or<br>countries) countries) GBP, global<br>portfolio)<br>Return (real,yearly average; left axis)<br>Sharpe ratio (excess return/SD; right axis)<br>Sharpe ratio<br>Return, yearly<br>average,real, in %<br>Sharpe ratio<br>Return, yearly<br>average,real, in %<br><!-- End of picture text --> _Note:_ This figure shows average annual real ex-post returns and Sharpe ratios (based on the time series of excess returns vis-à-vis US/UK bills) for the full sample period (Panel A) and for the modern period (Panel B) for different asset classes/portfolios. Table 7 shows the underlying numbers.

> 45 To calculate adjusted Sharpe ratios we follow standard practice so that Sharpe = excess return, with μ−Z∗σ + 16 2 241 3 ) − 361 3 2� where corresponds to the Z-score of the confidence ssBBjj ZZ= interval (here: 95%) and μ, σ, S and K are the mean, variance, skewness and kurtosis of the returns. “Excess return” cc cc cc cc cc cc cc �zz (zz −1)SS+ (zz −3zz (2zz −5zz )SS zz denotes the return above the risk-free assets (US/UK bonds or bills). Z represents a penalty factor for negative skewness and excess kurtosis.

39
Table 7: Asset class comparison across 200 years Panel A: _Full sample_ , 1815-2016

||Real total<br>returns<br>(yearly|<br>Nominal<br>total<br>returns|Real total<br>returns<br>(yearly|<br>SD<br>(nom.,<br>arithm|Be<br>U<br>|nchma<br>K/US**b**<br> <br>|rk:<br>**ills**<br> <br>|B<br>UK<br>|enchma<br>/US**bo**<br> <br>|rk:<br>**nds**<br> <br>|
|---|---|---|---|---|---|---|---|---|---|---|
||,<br>arithm.)|<br>(yearly,<br>_arithm._)|,<br>_geom._)|.<br>return)|Excess<br>return|<br>Sharpe<br>ratio|<br>Adj.<br>Sharpe<br>ratio|Excess<br>return|<br>Sharpe<br>ratio|<br>Adj.<br>Sharpe<br>ratio|
|External sovereign bonds<br>(globalportfolio)|6.85|7.99|5.78|15.03<br>|<br>4.75|0.35|0.38|4.29|0.32|0.35|
|US equities (S&P 500)|8.49|9.22|6.81|18.78|6.15|0.32|0.38|4.24|0.23|0.26|
|UK equities (FTSE)|5.47|6.48|4.55|14.04|3.07|0.25|0.28|2.53|0.21|0.23|
|US corporate bonds<br>(S&P AAA,since 1900)|-1.09|1.05|-1.41|7.89|-1.59|-0.28|-6.99|-2.82|-0.65|<br>-12.43|
|Domestic sovereign bonds<br>(16 adv. countries, since 1870)|3.15|4.40|2.56|10.73|1.64|0.18|0.29|0.21|0.02|0.04|
|Equity portfolio<br>(16 adv. countries, since 1870)|8.25|9.65|6.95|16.41|6.75|0.42|0.46|5.31|0.29|0.36|
|US Treasuries|4.25|4.87|3.84|9.44|1.29|0.21|0.19||||
|UK government bonds|2.94*|3.88|2.39|10.98|0.55|0.07|0.08||||
|US bills (3-m, since 1835)|2.05**|3.27|1.90|5.37|||||||
|UK bills (3-month)|2.39***|3.45|2.21|6.24|||||||

Panel B: _Modern sample_ , 1995-2016

||Real<br>total|Nominal<br>total|Real<br>total|SD<br>(nom.,<br>|Ben<br>UK|chmar<br>/US **bi**|k:<br>**lls**|B<br>UK|enchma<br>/US **bo**|rk:<br>**nds**|
|---|---|---|---|---|---|---|---|---|---|---|
||returns<br>(yearly,<br>_arithm_.)|returns<br>(yearly,<br>_arithm._)|returns<br>(yearly,<br>_geom._)|<br>arithm.<br>return)|Excess<br>return<br>|Sharpe<br>ratio|<br>Adj.<br>Sharpe<br>ratio|Excess<br>return|Sharpe<br>ratio|<br>Adj.<br>Sharpe<br>ratio|
|Sovereign bonds (in USD or<br>GBP, global portfolio)|9.89|12.4|8.96|14.29|9.52|0.66|0.68|6.26|0.33|0.45|
|US equities (S&P 500)|8.40|10.85|6.76|18.13|7.96|0.44|0.58|4.93|0.22|0.36|
|UK equities (FTSE)|6.38|8.50|5.15|15.57|4.78|0.30|0.47|1.71|0.09|0.17|
|US corporate bonds<br>(S&P AAA)|3.29|5.64|3.82|5.82|2.85|0.52|0.69|-0.18|-0.04|-0.04|
|Domestic sovereign bonds<br>(16 advanced countries)|5.23|7.55|4.70|10.95|4.69|0.42|0.57|1.54|0.15|0.19|
|Equity portfolio<br>(16 advanced countries)|9.17|11.50|6.71|21.72|8.63|0.39|0.51|5.48|0.20|0.32|
|US Treasuries|3.47|5.81|3.14|8.48|3.03|0.37|0.60||||
|UK government bonds|4.66|6.76|4.33|8.51|3.07|0.38|0.50||||
|US bills (3-month)|0.44|2.72|0.42|2.10|||||||
|UK bills (3-month)|1.59*|3.61|1.56|2.76|||||||

_Note:_ The table shows average yearly arithmetic and geometric returns of our global portfolio of external sovereign bonds as well as for other asset classes / portfolios. See text for sources and further details. ***, **, and * indicate statistical significance at the 1%, 5% and 10% level (t-test for difference in returns compared to our sov. bond portfolio).

40
Across the two centuries under study, a global portfolio of external sovereign bonds shows favorable riskreturn properties compared with other financial assets, with substantial variation in relative performance across time. On average, only US equities and the portfolio of advanced country equities show a higher return. In the full sample, the return on external sovereign bonds is significantly higher than that of US corporate bonds, UK equities, US or UK government bonds and that of the portfolio of domestic sovereign bonds from 16 countries. Our external bond portfolio also shows a high Sharpe ratio, on the same level as US equities, and exceeding that of the other asset classes. The CAPM analysis in Appendix B7 further suggests that the beta for this asset class is low, especially in the historical sample (well below 0.5), suggesting that external bonds provided a diversification service with respect to US/UK equities.

In the modern period (post-1994), foreign-currency sovereign bonds fare even better (Panel B in Figure 14 and Table 7). The Sharpe ratio is highest among the asset classes under study and the returns exceed those on US and UK equities, on US corporate bonds, and on advanced country equity and domestic bond portfolios. High average coupon rates during the modern period coupled with the paucity of serious credit events have delivered a high ex-post return for this asset class in the past three decades. However, this does not imply that this benign combination is set to become the “new normal” for the sovereign bond market, as rising debt difficulties in developing countries can morph into defaults abruptly (Reinhart, Reinhart, and Trebesch 2018).

# 6.3. Total returns during major financial crises

We next examine the performance of each asset class around selected major crises in financial center(s) that have different features, as to their global effects. In particular, we compare the cumulative total return of US stocks, US Treasuries, and external sovereign bonds (our sample of serial defaulters) three years before and after (i) the New York Panic of 1907 (crash month: October), (ii) the Great Depression (crash month: October 1929), and (iii) the recent Financial Crisis (crash month: Sept. 2008). Figure 15 shows the resulting monthly return series, indexed to 100 in the starting month of the crisis. The results from these case studies are broadly in line with the aggregate statistics summarized above. External sovereign bonds show higher cumulative returns than stocks in two of the three spells (by the end of year three). The returns on our global portfolio also tend to be less volatile than those of stocks. Compared with US Treasuries, external sovereign bonds fare better in 1907, but significantly worse during the Great Depression. In the Financial Crisis of 2008, external sovereign bonds deliver worse returns compared with US bonds at the height of the crisis, but subsequently show a much better performance.

Summing up, these findings suggest that sovereign bonds of periphery countries can provide investors with a viable diversification strategy and, absent a surge in the incidence of default, comparatively high returns. The high average coupon payments on external sovereign bonds help to stabilize total returns when prices are volatile.

41
Figure 15: Asset returns around major financial crises Panel A: New York Panic of 1907: An Episode of Financial Contagion <!-- Start of picture text --> 150<br>125<br>100<br>75<br>50<br>-3 -2 -1 t 1 2 3<br>Years around financial crisis<br>US equities US Treasuries (10 year)<br>External sovereign bonds<br>Cumulative total return index<br><!-- End of picture text --> Panel B: Great Depression: A Global Crisis <!-- Start of picture text --> 150<br>125<br>100<br>75<br>50<br>25<br>0<br>-3 -2 -1 t 1 2 3<br>Years around financial crisis<br>US equities US Treasuries (10 year)<br>External sovereign bonds<br>150<br>125<br>100<br>75<br>50<br>-3 -2 -1 t 1 2 3<br>Years around financial crisis<br>US equities US Treasuries (10 year)<br>External sovereign bonds<br>Cumulative total return index<br>Cumulative total return index<br><!-- End of picture text --> Panel C: Global Financial Crisis of 2008: An Advanced Economy Crisis _Notes:_ This figure shows a cumulative real return index around three financial crisis events: the New York Panic 1907, starting in October, the Great Depression (dated on Black Tuesday in October 1929) and the Global Financial Crisis (culminating in September 2008). The series are indexed at 100 in the starting month of the crisis. The series on external sovereign bonds is based on the sub-sample of serial defaulters (see Section 4 for details).

42
# **7. Conclusion**

We show that the history of external sovereign bonds is a history of frequent investor profits and occasional losses. Defaults and haircuts have been a recurring feature in this market, but on average investors were compensated for the risks they took also when compared with other asset classes such as equity. We have uncovered an excess return over the past two centuries, which we deem as informative about the attitude of investors toward risk. The observed ex-post spreads are wide, even taking into account losses associated with default and debt restructuring. Central to this finding are the comparatively rich coupons offered by this asset class.

The data we have compiled will allow for a reassessment of how markets price sovereign risk and how investors form beliefs about crash probabilities in emerging markets. A growing literature emphasizes expectations errors on the part of global investors. During periods of optimism and financial stability, creditors may become dismissive of the possibility of default and expect full repayment of the rich coupons offered in this asset class, resulting in lending booms. This recurrent pattern of “market exuberance” is integral to the narrative in Reinhart and Rogoff (2009) and is explored theoretically in Gennaioli and Shleifer (2018). Future work could use our data to test these notions, as well as new and old asset pricing theories, in particular models of long-run risk (Bansal and Yaron 2004) and disaster risk (Barro 2006; Gabaix 2012).

The paper will also facilitate research on sovereign defaults and their resolution (e.g., Broner et al. 2014; Corsetti, Erce, and Uy 2018; Erce and Mallucci 2018; Gourinchas, Martin, and Messer 2018; Lorenzoni and Werning 2018; Aguiar et al. 2019). In particular, we see the need to reexamine our results from the vantage point of debtor countries and with a view to debt sustainability. What is the appropriate scope of debt relief when countries fall into debt distress? How can serial restructurings and delays in crisis resolution be reduced? And, importantly, what motivates countries to pay the large observed premia to their foreign creditors?

43
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49
APPENDIX

# **Online Appendix to “Sovereign Bonds since Waterloo”** Meyer, Reinhart, Trebesch (QJE)

## **Overview:**

Appendix A: Financial and macroeconomic data Appendix B: Bond prices and investor returns (starting on page A4) Appendix C: Debt restructurings and haircuts (starting on page A42)

# Appendix A: Financial and macroeconomic data

This Appendix lists the data sources on financial and macroeconomic variables used in the paper.

### <u>Three-month UK bills, monthly, since 1815</u>

The 3-month UK bill return index in the 19<sup>th</sup> century builds on data by GFD and includes observations from commercial bills (open market rates of discount). For the years 1815-1823 the data comes from Homer (1967). For 1824-1857, the series is retrieved from the NBER Macrohistory database that draws on the open market rates reported in the UK “Parliamentary papers”. For 1857-1899 the bills data comes from The Economist and the Investor’s Monthly Manual. For 1900-1913, the series comes from the NBER Microhistory database and for 1914-1923 from Morgan (1952). The data since 1924 is retrieved from the Central Statistical Office of the British government.

### <u>Three-month US bills, monthly, since 1835</u>

The 3-month US bills return series draws on various sources. From 1835-1918, we use the approximated series by GFD, which is based on the minimum rate of the coupon on US Government bonds and commercial bills. For the years 1835-1862, that data was retrieved from Homer (1967), Martin (1886), The Economist (1854-1861) and the periodical Hunt’s Merchants Magazine (1843-1853). From 18621918, data comes from The Financial Review. From 1919 onwards, data is retrieved from the Federal Reserve Bank using 90-day Treasury bills. From 1920 until 1942, the data comes from the Federal Reserve Bank, National Monetary Statistics. From 1942 onwards, we retrieve 3-month US bills returns from the Center for Research in Security Prices (CRSP). CSRP calculates total returns based on a comprehensive database of historical US bills. In each month, a representative Treasury bill is selected that is closest to the target maturity.

### <u>US Treasury bonds, monthly, since 1815</u>

The long-term US Treasury bond return index is from GFD and constructed using data by Homer (1967) and Martin (1886) for the years 1815-1862, from The Economist (1854-1861) and from the periodical Hunt’s Merchants Magazine (1843-1853). For 1862-1919 data comes from The Financial Review. From 1920 onwards, the data comes from the Federal Reserve Bank and Salomon Brothers (1995). Whenever possible, we use an index of 10-year bonds. During the 19<sup>th</sup> century, the available indices also contain A1
APPENDIX bonds with a much longer maturity, since average maturities were much longer then. From 1942 on, we rely on the 10-year government total bond return series provided by the CRSP database, which builds on a comprehensive collection of US Treasury bond prices.

## <u>UK government bonds, monthly, since 1815</u>

The return index on long-term UK government bonds is from GFD and was compiled from Neal (1990) for 1815-1823, from The Times (1824-1844), from the periodical The Banker’s Magazine (1844-1852), and from the Central Statistical Office of the British government (1853 onwards). Whenever possible, we use an index of 10-year bonds, but in the 19<sup>th</sup> century, the available indices also contain bonds with a much longer maturity, since average maturities were much longer compared to today.

## <u>S&P US Stocks Total Return Index, monthly, since 1815</u>

From 1815 to June 1962, we use the US stock market returns index provided by Schwert (1990). From July 1962 onwards, we use the S&P US Stocks Total Return Index from Standard & Poor’s retrieved from GFD.

## <u>FTSE UK Stocks Total Return Index, monthly, since 1815</u>

This index is from GFD and compiled from the following sources: Rostow and Schwartz (1953) which contains data on Bank of England Shares and the East Indies Company from 1815 to 1850, Hayek (1935) from 1851-1867, and Smith and Horne (1934) from 1874 to 1922. Additional sources are the periodical Banker’s Magazine (1907-1933), The Economist (1933-1962), and The Financial Times from 1950 onwards. For more recent decades, the data comes from the Central Statistical Office of the British government for the years 1939-1988 and from Eurostat from 1989 until today.

## <u>UK inflation/CPI series, monthly</u>

The monthly UK CPI series comes from the Bank of England’s (BoE) historical dataset sheet called “A Millennium of UK Data”, Version 3.1, by Thomas and Dimsdale (2017). From 1914 onwards, we use the spliced monthly consumer price index. For the period before WW1, we use the spliced monthly wholesale/producer price index. These series are those recommended by the BoE.

## <u>US CPI series, monthly</u>

The monthly “Historical Consumer Price Index for All Urban Consumers” is from the US Bureau of Labor Statistics and starts in 1913. For the period before that we rely on series gathered and cited by Reinhart and Rogoff (2009), in particular from the Historical Statistics of the United States. Note that we only have ten USD bonds in our sample that were issued before 1913.

## <u>US Corporate bond total return index, monthly, since 1900</u>

The US corporate bond return series is spliced by combining the returns on the S&P 500 AAA Investment Grade Corporate Bond Index from GFD until 1984 with data from the Bank of America Merrill Lynch US Corp AAA Total Return Index thereafter, which we retrieved from the Federal Reserve Bank of St. Louis database.

# **References Appendix A** (those not cited in the main paper):

British Central Statistical Office (various issues) _Annual Abstract of Statistics_ . London: CSO. Hayek, Friedrich A. (1935) _Prices and Production._ London: Routledge.

A2
APPENDIX Homer, Sidney (1967) _A History of Interest Rates_ . Sydney: Princeton University Press.

- Martin, Joseph G. (1886) _Martin’s Boston Stock Market: Eighty-eight Years from January 1, 1798 to January 1886_ . Boston.

- Morgan, Edward V. (1952). _Studies in British Financial Policy, 1914-1925_ . London: Macmillan.

- Neal, Larry (1990) _The Rise of Financial Capitalism: International Capital Markets in the Age of Reason._ Cambridge: Cambridge University Press.

NBER Macrohistory database.

- Rostow, Walt W. and Anna J. Schwartz (1953) _The Growth and Fluctuation of the British Economy 1790-1850_ , Oxford: Oxford U.P.

- Salomon Brothers (1995). _Analytical Record of Yields and Yield Spreads._ New York: Salomon Brothers.

- Schwert, William (1990) Indexes of United States Stock Prices from 1802 to 1987 _, Journal of Business_ , 63(3), 399-426

- Smith, K.C. and G.F Horne (1934) _An index number of securities: 1867-1914_ , London: Royal Economic Society.

- Thomas, Ryland and Nicholas Dimsdale (2017) _A Millennium of UK Data_ , Bank of England OBRA dataset

<u>Newspapers: The Economist, Financial Times, Hunt’s Merchants Magazine.</u> <u>Periodicals: Investors Monthly Manual, Banker’s Magazine, The Financial Review.</u>

- <u>Datasets: Eurostat, US Bureau of Labor Statistics, Federal Reserve Bank National Monetary Statistics,</u> Standard and Poors.

A3
APPENDIX

# Appendix B: Bond prices and investor returns

## B1. Database of bond prices and returns

This section summarizes the sources and coding for our database of sovereign bond prices and returns across 200 years. As explained in the main text we focus on bonds issued (i) by central governments, (ii) in foreign currency (only US dollar and British pound bonds), (iii) traded and priced on the London or New York Stock Exchanges and (iv) with a fixed coupon rate (no floating rate instruments).

We first discuss the historical data, then move to the modern sample that uses JP Morgan’s EMBI data and then describe the final, merged, 200-year dataset.

### **Historical bond prices and returns, 1818-1980**

For the 19<sup>th</sup> century we use price data of those external sovereign bonds traded on the London Stock Exchange (LSE). From the early 20<sup>th</sup> century on, these data are complemented with bonds traded on the New York Stock Exchange (NYSE). New York becomes the dominant market for trading and issuing external sovereign bonds from the mid-1920s onwards.

To identify bonds and their prices we rely on several main sources. The London price data for the early 19<sup>th</sup> century and until 1870 comes from the Money Market Review, The Economist, Circular to Bankers, Course of the Exchange, and The Banker’s Magazine. For the 1869-1929 period we mostly use LSE pricing data from the Investors Monthly Manual, as provided by Goetzmann and Rouwenhorst at the International Center for Finance at Yale. We extend their data series of LSE sovereign bond prices by 50 years, using quotations from The Economist and Financial Times from 1930 to 1980. For illustration, Figure B1 shows an example of how this source looks like. The bond price data from the NYSE was coded from the “Bank and Quotation Section” of the Commercial Financial Chronicle (from 1905 to 1927 and 1954 to 1978) and from the Bank and Quotation Record (from 1927 to 1954).

Our baseline is to use price data of the last trading or business day of the month. We deviate from this rule only for a few dozen bonds before 1850, when markets were not as developed and liquid. For that period, we use the last available price of a month and, rare occasions, also the average between low and high prices of a month.

Beyond prices, we draw on additional sources to collect the financial and legal characteristics of each bond, in particular amount issued, issue date, maturity, coupon rates, coupon frequency, repayment schedule, guarantees or type of issuer. These are taken from bond manuals such as Fenn’s Compendium of the English and Foreign Funds (1837-1838, 1855, 1857, 1863, 1867, 1869, 1874, 1876, 1883, 1889, 1893); Fortune’s Epitome of the Stock and Public Funds (1800, 1810, 1820, 1824, 1826, 1833, 18381839, 1850-1851, 1856); Kimber's Records on Government Debts and other Foreign Securities (1918, 1919, 1922, 1934), Moody's Manuals on Foreign and American Government Securities (yearly 1920196ex0), and the London Stock Exchange Yearbooks (1877-1878, 1880-1881, 1883-1888, 1890, 1894A4
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APPENDIX <u>Sample: Our original historical database contains 329,637 monthly bond price quotes of 1,712 bonds</u> traded in London and New York and listed in the original sources under categories such as “Foreign Government”. Upon closer inspection, we drop roughly one third of these observations, so as to get to a homogenous sample of foreign-currency sovereign bonds issued by independent states in US dollars or British pounds.

Specifically, we drop:

- 388 bonds that were issued by a state under colonial status. These are colonial bonds by Antigua and Barbuda, Barbados, Fiji, Ghana, Grenada, Guyana, Hawaii, Hong Kong, Iceland, India, Indonesia, Iran, Jamaica, Kenya, Liberia, Mauritius, Morocco, Newfoundland, Nigeria, Palestine, Philippines, Saint Luca, Sierra Leone, Singapore, Southern Rhodesia, Sri Lanka, Straits Settlement, Sudan, Tanganyika, Trinidad and Tobago, and Zanzibar. This reduces our dataset to 292,000 monthly bond prices.

- 256 sub-national bonds, issued by provinces and municipalities but not the central government, reducing the sample to 233,968 monthly bond prices.

- 80 local currency bonds as well as 7 bonds denominated in other foreign currencies (e.g., German Mark or French Franc).

- 12 bonds that were explicitly guaranteed by other governments, via a respective clause in the bond contract. These include the Greek 1833 bonds whose interest and principal payments were fully guaranteed by Great Britain, France and Russia, or the Austrian 6% guaranteed bond of 1923 which had been issued under the auspices of the League of Nations with guarantees by several European governments. Investor reports of the time regard these bonds not as debt owed by the issuing sovereign but as a liability of the guarantor sovereign. For example, the IMM lists guaranteed bonds in the section of the guaranteeing nation, for example, Great Britain.

- Finally, we exclude three sets of bonds: 10 bonds with erratic and infrequent price quotes (this includes a bond issued by the Confederate States of America in London)<sup>1</sup> ; 11 exotic bonds such as land warrant bonds or bonds issued by the Khedive of Egypt, but not by Egypt itself; and 37 bonds for which we did not find basic details on coupon, amount issued, or currency.

Our cleaned, <u>final historical dataset after these adjustments covers 209,890 monthly prices of 911</u> sovereign external bonds issued in US dollar and British pound.

# **Modern bond period, 1990-2016**

For the modern period, we use pricing data provided by JP Morgan, which is available from 1989 onwards, albeit initially for less than five countries that issued bonds in their Brady debt restructurings. More details are provided in the draft. In total the EMBI data cover 56,244 monthly price quotations of 6411 sovereign external bonds issued in US dollar (none is issued in British pound).

> 1 The so-called Confederate cotton bond was a 20-year security with a 7% coupon payable in British sterling and issued in London. The bonds were illiquid and appear only in our pricing database for a few months.

A6
APPENDIX

# **Final bond pricing sample, 1815-2016**

The merged (historical + modern) bond pricing sample includes a total of 1,552 (911 + 641) foreigncurrency sovereign bonds issued and traded in London and New York with 266,146 (209,890 + 56,244) monthly pricing observations of 91 debtor countries. Figure B3 shows the data availability by country.

The apparent gaps in the sovereign bond price and return data series can mainly be explained by the fact that countries tapped New York and London markets irregularly. For example, there are nearly a dozen countries that placed foreign-currency bonds abroad during the interwar years but stopped doing so after WW2. This is particularly true for many advanced countries, for example, in Europe, which now borrow almost exclusively in their own currency (Euro, Swiss Franc, Swedish Krona etc.). The series thus end because old bonds mature and no new bonds enter the dataset. Moreover, the gaps in the 1960s, 1970s and 1980s can be explained by the shift from bond to bank loan financing. In this period sovereign lending was dominated by syndicated bank loans and almost no country issued bonds abroad.

To deal with country break-ups and country mergers we follow conventional practice (in particular the practice in investor manuals and financial reports) and assign the bonds of a country that was broken up or newly united to the respective successor state(s): Country mergers:

- <u>Australia: Bonds issued by New South Wales and Western Australia are assigned to Australia</u> after unification in 1901.

- <u>Germany: Bonds issued by Prussia are assigned to the German Empire/Germany after 1871.</u>

- <u>Italy:</u> Bonds issued by the Kingdom of Sardinia and the Kingdom of the Two Sicilies are assigned to Italy after the Proclamation of the Kingdom of Italy in 1861.

- <u>South Africa: Bonds by the Union of South Africa are assigned to South Africa after 1926.</u>

- <u>Yugoslavia: Bonds issued by Serbia and by Montenegro are assigned to Yugoslavia after 1918.</u>

- <u>Zimbabwe: Bonds of Southern Rhodesia and Rhodesia are assigned to Zimbabwe after 1965.</u>

Country break-ups:

- <u>Austria-Hungary: Bonds that were issued by the Austrian Empire or the Kingdom of Hungary</u> during the dual monarchy of Austria-Hungary are assigned to Austria or Hungary, respectively.

- • <u>Gran Colombia: Bonds issued by Gran Colombia, but assigned to Colombia after the break-up,</u> were linked to Colombia. We use the same procedure for Venezuela. The bonds assigned to Ecuador were not trading in London.

- <u>Ottoman Empire:  Bonds of the former Ottoman Empire were assigned to Turkey.</u>

For presentation purposes, in the case of country mergers, we use the name of the new unified country to present the spliced series in Figure B3 and elsewhere (e.g., we denote the series as “Germany” instead of “Germany-Prussia”). Similarly, in the case of country breakups, we use the name of the new country to denote the long-run spliced series (e.g., “Austria” instead of “Austria-Hungary”). Countries that existed only briefly or with limited foreign recognition are not included (e.g., the Confederate States of America).

A7
APPENDIX Figure B3: Data coverage by country (prices and bid-ask spreads), 1815-2016 <!-- Start of picture text --> Algeria<br>Angola<br>Argentina<br>Armenia<br>Australia<br>Austria<br>Azerbaijan<br>Belarus<br>Belgium<br>Belize<br>Bolivia<br>Brazil<br>Bulgaria<br>Cameroon<br>Canada<br>Chile<br>China<br>Colombia<br>Costa Rica<br>Cote d'Ivoire<br>Croatia<br>Cuba<br>Czechoslovakia<br>Denmark<br>Dominican Republic<br>Ecuador<br>Egypt<br>El Salvador<br>Estonia<br>Ethiopia<br>Finland<br>France<br>Gabon<br>Georgia<br>Germany<br>Ghana<br>Greece<br>Guatemala<br>Haiti<br>Honduras<br>Hungary<br>Indonesia<br>Iraq<br>Ireland<br>Italy<br>1815 1835 1855 1875 1895 1915 1935 1955 1975 1995 2015<br>Prices, returns, and bid-ask spreads Prices and returns<br>Year of independence<br><!-- End of picture text --> A8
APPENDIX Figure B3 (continued): Data coverage by country (prices and bid-ask spreads), 1815-2016 <!-- Start of picture text --> Jamaica<br>Japan<br>Jordan<br>Kazakhstan<br>Kenya<br>Latvia<br>Lebanon<br>Lithuania<br>Malaysia<br>Mexico<br>Mongolia<br>Morocco<br>Namibia<br>Netherlands<br>New Zealand<br>Nicaragua<br>Nigeria<br>Norway<br>Pakistan<br>Panama<br>Paraguay<br>Peru<br>Philippines<br>Poland<br>Portugal<br>Romania<br>Russia<br>Senegal<br>Slovak Republic<br>South Africa<br>South Korea<br>Spain<br>Sri Lanka<br>Sweden<br>Switzerland<br>Tanzania<br>Thailand<br>Trinidad and Tobago<br>Turkey<br>Ukraine<br>Uruguay<br>Venezuela<br>Vietnam<br>Yugoslavia<br>Zambia<br>Zimbabwe<br>1815 1835 1855 1875 1895 1915 1935 1955 1975 1995 2015<br>Prices, returns, and bid-ask spreads Prices and returns<br>Year of independence<br><!-- End of picture text --> _Note_ : For brevity, in case of country mergers or country break-ups, we use the name of the new country and omit the historical name (e.g., “Germany” instead of “Germany-Prussia”, “Yugoslavia” instead of “Serbia”, “Turkey” instead of “Ottoman Empire”). Year of Independence from Reinhart and Rogoff (2009). If independence was earlier than 1815 then that year is marked as the year of independence for presentation purposes.

A9
APPENDIX

# B2. Computing Returns: Data and Assumptions

**_Treatment of partial and missed coupon payments:_** A main challenge to compute total returns on historical sovereign bonds was to collect bond-level data on partial or missed coupon payments during spells of default. We retrieved information on interest servicing during crises from the historical reports of the UK-based Corporation of Foreign Bondholders (CFB) (1876-1944, 1945-1986), the US-based Foreign Bondholders Protective Council (FBPC) (1934-1940, 1945-1950, 1953-1964/67), the Association Belge pour la Défense des Détenteurs de Fonds Publics (1898-1915), and the French Association Nationale des Porteurs Franҫais de Valeurs Mobiliéres (1936-1945, 1948-1974, 1987-1988, 1996). To fill gaps, we also rely on the rich body of investor reports that we gathered for the long-run dataset of prices and restructurings (see Appendix B1 above and Appendix C1 below). Particularly helpful were reprints of (temporary) debt agreements, official announcements, or press releases of the debtor government. We typically extracted the relevant information on interest servicing from text statements such as: “Coupon due May 01, 1932 paid in Jan. 1933 at rate of 60% of the face value of the coupon.”  For most bonds we have exact amounts and dates of payments. In case the date of partial coupon payments is missing we assume that the debtor paid on the due date of the coupon (original deadline). In the case we do not find any indication that coupons are missing, we assume that they are fully paid. After gathering all coupon details, we again calculate accrued interest by equally distributing the (full or partial) payments over the original coupon payment period (eq. 5). For example, in the case of a yearly coupon frequency, we calculate returns by dividing the coupon paid by 12 (equal amounts per month).

**_Accounting for debt restructurings/ haircuts:_** We account for creditor losses due to a debt restructuring or debt write-off. We do so by combining the old defaulted bonds and the new instruments that creditors receive in the exchange with the implicit assumption that creditors keep the newly restructured bond in the portfolio. We also account for the share of debt written off as well as for potential cash or so-called “goodwill” payments that are made in the wake of a restructuring. More precisely, we create spliced series on prices, coupons and returns by combining the old and new bond in the month of the debt exchange.

In the case of a nominal debt reduction (face value haircut), bondholders receive a reduced total face value in new bonds compared to what they held in their old, defaulted bonds. We account for this by creating a spliced series of old and new bonds for which we multiply all post-restructuring bond prices and coupon payments by the size of the write-off. For example, in the case of a face value reduction of 40%, all future price observations of the new bond series are multiplied by 0.6 (1 minus the write-off of 0.4). Accordingly, to create the spliced series, we would also adjust all future coupon payments on the new bonds by multiplying them by 0.6. Cash payments agreed on in the wake of a debt restructuring, e.g., for the settlement of arrears or as deal “sweeteners”, are accounted for in the month in which they are made. For illustration, we can rewrite our baseline bond return Equation 2 for the month of the restructuring (when old bonds are exchanged into new bonds) as follows: restructuring (when old bonds are exchanged into new bonds) as follows: =<sup>NNnnssnn bbppnnBB,mm∗(1 −wwrriittssw</sup> −1 p<sup>ww) + CCnnssnn bbppnnBB,mm∗</sup><sup><u>(1 −wwrriittssw</u>ww) + CCshmm</sup> nnssnn bbppnnBB,mm RR BB bbppnnBB,mm−1 A10 NN
# APPENDIX

where is the spliced return series, p is the secondary market price of the old bond in the month prior to the restructuring (or the last pricing observation we have before that), nnssnn bbppnnBB,mm BB bbppnnBB,mm−1 RR NN is the price of the newly issued bond once it starts trading (first month for which we have a pricing observation post-restructuring),nnssnn bbppnnBB,mm is the size of the nominal debt reduction (face value NN haircut) on the old bonds, are coupon payments on the new bond, and h are cash or wwrriittssw ww “goodwill” payments. For the spliced series, the formula is applied accordingly in all months following nnssnn bbppnnBB,mm mm CC CCs ∗ the restructuring, only that p in the denominator is replaced by , meaning the adjusted price of the new bond lagged by one month. In case the BB bbppnnBB,mm−1 nnssnn bbppnnBB,mm NN NN restructuring only involves a rescheduling of maturities but no face value debt reduction, the term (1 −wwrriittssw ww) would be zero, but the change in maturities should be reflected in the secondary market price of the new bond (this type of debt exchange is sometimes called “debt reprofiling”). wwrriittssw ww For the historical restructuring cases, Box B1 shows how old and new bonds were linked as well as the conversion rate ( ) with which coupons and prices are multiplied for the spliced return series of the new bonds. The table includes those restructured bonds for which prices were available. 1 −wwrriittssw ww Box B1 Linking old and new bonds to create long-run return series, historical restructurings

|Country|Bond name|Bond<br>ID|<br>Successor bond name|Successor<br>bond ID|Conversion<br>rate of old<br>into new<br>bonds|Date of<br>bond<br>exchange|First pricing<br>observ. of<br>successor<br>bond|
|---|---|---|---|---|---|---|---|
|Bolivia|6% Loan of 1872|179|debt buyback||0.476|03/1880|03/1880|
|Brazil|4% Loan of 1889|186|1.5 (4)% Loan (Plan A); 3.75%<br>Bonds of 1944|<br>211;258|Plan A: 1;<br>Plan B: 0.5|11/1943|04/1944|
|Brazil|4% Loan of 1901-<br>1905|185|1.5 (4)% Loan (Plan A); 3.5%<br>Bonds of 1944 (Plan B)|238;239|Plan A: 1;<br>Plan B: 0.5|11/1943|04/1944|
|Brazil|5% Bonds of 1898|187|3.375 (5)% Loan (Plan A);<br>3.75% Bonds of 1944|234;235|Plan A: 1;<br>Plan B: 0.8|11/1943|04/1944|
|Brazil|5% Loan of 1931<br>(series A)|245|3.375 (6.5)% Loan (Plan A);<br>3.75% Bonds of 1944|246;247|Plan A: 1;<br>Plan B: 0.8|11/1943|04/1944|
|Brazil|<br>5% Loan of<br>1931(series B)|248|3.375 (6.5)% Loan (Plan A);<br>3.75% Bonds of 1944|249;250|Plan A: 1;<br>Plan B: 0.8|11/1943|04/1944|
|Brazil|5% Loan of 1913|203|1.75 (5)% Loan (Plan A);<br>3.75% Bonds of 1944|240;241|Plan A: 1;<br>Plan B: 0.5|11/1943|04/1944|
|Brazil|5% Loan of 1914|188|3.375 (5)% Loan (Plan A);<br>3.75% Bonds of 1944|242;243|Plan A: 1;<br>Plan B: 0.8|11/1943|04/1944|
|Brazil|6.5% Loan of 1927|208|3.375 (6.5)% Loan (Plan A);<br>3.75% Bonds of 1944|213;244|Plan A: 1;<br>Plan B: 0.5|11/1943|04/1944|
|Brazil|6.5% Loan of 1926|224|3.375 (6.5)% Loan (Plan A);<br>3.75% Bonds of 1944|225;232|Plan A: 1;<br>Plan B: 0.8|11/1943|07/1944|
|Brazil|6.5% Loan of 1927|226|3.375 (6.5)% Loan (Plan A);<br>3.75% Bonds of 1944|227;233|Plan A: 1;<br>Plan B: 0.8|11/1943|07/1944|
|Brazil|7% Loan of 1922|228|3.5 (7)% Loan (Plan A); 3.75%<br>Bonds of 1944|<br>229;231|Plan A: 1;<br>Plan B: 0.8|11/1943|07/1944|
|Brazil|8% Loan of 1921|222|3.5 (8)% Loan (Plan A); 3.75%<br>Bonds of 1944|<br>223;230|Plan A: 1;<br>Plan B: 0.8|11/1943|07/1944|
|Brazil|5% Bonds of 1895|192|1.75 (5)% Loan (Plan A);<br>3.75% Bonds of 1944|212;251|Plan A: 1;<br>Plan B: 0.5|11/1943|09/1945|
|Brazil|4% Railway Bonds of<br>1911|199|1.5 (4)% Loan (Plan A); 3.75%<br>Bonds of 1944 (Plan B)|<br>252;253|Plan A: 1;<br>Plan B: 0.5|11/1943|10/1945|
|Chile|4.5% Bonds of 1887|316|<br>1.5-3% Mixed Bonds of 1948|343|1|03/1948|03/1953|
|Chile|5% Loan of 1911 (1st<br>series)|322|1.5-3% Mixed Bonds of 1948|343|1|03/1948|03/1953|
|Chile|<br>6% Loan of 1926|330|1.5-3% Mixed Bonds of 1948|343|1|03/1948|03/1953|
|Chile|6% Bonds of 1926|348|1.5-3% of 1948|349|1|03/1948|12/1948|
|Chile|6% Bonds of 1927|350|1.5-3% of 1948|349|1|03/1948|12/1948|

A11
APPENDIX

|Chile<br>Chile|6% Bonds of 1928<br>6% Bonds of 1929|352<br>346|1.5-3% of 1948<br>1.5-3% of 1948|349<br>349|1<br>1|03/1948<br>03/1948|12/1948<br>12/1948|
|---|---|---|---|---|---|---|---|
|Chile|6% Bonds of 1930|347|1.5-3% of 1948|349|1|03/1948|12/1948|
|<br>Chile|<br>6% Railway Bonds of<br>1928|<br>351|<br>1.5-3% of 1948|<br>349|<br>1|<br>03/1948|<br>12/1948|
|Chile|<br>7% of 1922, due 1942|345|1.5-3% of 1948|349|1|03/1948|12/1948|
|Chile|7% of 1922, due 1942<br>(assented 1935)|<br>356|1.5-3% Mixed Bonds of 1948|343|1|03/1948|12/1948|
|Chile|<br>6% Bonds of 1926<br>(assented 1935)|357|1.5-3% Mixed Bonds of 1948|343|1|03/1948|12/1948|
|Chile|<br>6% Bonds of 1927<br>(assented 1935)|358|1.5-3% Mixed Bonds of 1948|343|1|03/1948|12/1948|
|Chile|<br>6% Bonds of 1928<br>(assented 1935)|355|1.5-3% Mixed Bonds of 1948|343|1|03/1948|12/1948|
|Chile|<br>6% Bonds of 1929<br>(assented 1935)|353|1.5-3% Mixed Bonds of 1948|343|1|03/1948|12/1948|
|Chile|<br>6% Bonds of 1930<br>(assented 1935)|354|1.5-3% Mixed Bonds of 1948|343|1|03/1948|12/1948|
|Chile|<br>6% Railway Bonds of<br>1928 (assented 1935)|359|1.5-3% Mixed Bonds of 1948|343|1|03/1948|12/1948|
|Colombia|<br>1-6% active bonds of<br>1845|392|4.5-4.75% Bonds of 1873|244|0.34|12/1873|07/1874|
|Colombia|2-3% Bonds of 1860|391|4.5-4.75% Bonds of 1873|244|0.66|12/1873|07/1874|
|Colombia|6% Bonds of 1927|399|3% of 1940|401|1|06/1941|07/1941|
|Colombia|6% Bonds of 1928|398|3% of 1940|401|1|06/1941|07/1941|
|Colombia|4.5-4.75% Bonds of<br>1873|389|1.5-3% Bonds of 1896|388|1|12/1896|10/1897|
|Colombia|<br>6% Bonds of<br>18221824|397|1-6% Bonds of 1845|392|1|01/1845|12/1845|
|Costa Rica|,<br>7% Loan of 1926|408|Refunding 1.5-3% of 1952|409|1|11/1952|03/1954|
|Costa Rica|6% Bonds of 1871<br>(series 1)|405|5% Bonds of 1886 (series<br>A);4-5% Bonds of 1886 (series<br>B)|<br>402;403|1|06/1885|09/1886|
|Costa Rica<br>Costa Rica|7% Bonds of 1872<br>4-5% Bonds of 1886<br>(series B)|407<br>403|<br>4-5% Bonds of 1886 (series B)<br>4-5% Bonds of 1911|403<br>404|0.5<br>0.65|06/1885<br>12/1910|09/1886<br>12/1911|
|Costa Rica|<br>5% Bonds of 1886<br>i A|402|4-5% Bonds of 1911|404|0.75|12/1910|12/1911|
|Cuba|(seres )<br>5.5% Bonds of 1930,<br>d 1940|418|4.5% of 1937|420|1.1|02/1938|07/1938|
|Czechoslovakia|ue<br>8% Bonds of<br>1922/1924|424|debt buyback||0.75|04/1960|12/1960|
|Ecuador|<br>1-6% Bonds of 1855|454|4.5-5% Bonds of 1891|455|0.4|07/1892|07/1893|
|Egypt|7% Bonds of 1864|458|7% Bonds of 1877,1880<br>(dated 1876)|465|1|07/1880|08/1880|
|Egypt|9% Bonds of 1867|466|<br>7% Bonds of 1877,1880<br>(dated 1876)|465|1|07/1880|08/1880|
|Egypt|7% Bonds of 1862|462|<br>7% Bonds of 1877,1880<br>(dated 1876), 5% preferred<br>Bonds of 18771880|465;464|1|11/1876|12/1876|
|Egypt|7% Bonds of 1862<br>(series 2)|463|,<br>7% Bonds of 1877,1880<br>(dated 1876), 5% preferred<br>Bonds of 18771880|465;464|1|11/1876|12/1876|
|Egypt|7% Bonds of 1868|459|,<br>7% Bonds of 1877,1880<br>(dated 1876), 5% preferred<br>Bonds of 18771880|465;464|1|11/1876|12/1876|
|Egypt|7% Bonds of 1873|460|,<br>7% Bonds of 1877,1880<br>(dated 1876), 5% preferred<br>Bonds of 18771880|465;464|1|11/1876|12/1876|
|El Salvador|6% Bonds of 1908|468|,<br>6% Loan of 1923 (Series B)|470|1|09/1923|02/1924|
|El Salvador|7% Bonds of 1915|469|6% Loan of 1923 (Series B)|470|1|09/1923|02/1924|
|Greece|5% Bonds of<br>1824,1825|506|<br>5% Loan of 1879|516|0.3|12/1878|07/1880|
|Guatemala<br>|<br>5% Loan of 1856<br>|529<br>|4% Bonds of 1888<br>|530<br>|1<br>|03/1888<br>|09/1888<br>|
|Guatemala|6% Bonds of 1869|532|4% Bonds of 1888|530|1|03/1888|09/1888|
|Guatemala<br>|4% Bonds of 1888<br>|530<br>|4% Bonds of 1895<br>|531<br>|0.75<br>|07/1895<br>|12/1895<br>|
|Italy|7% Loan of 1925|565|1-3% of 1947|566|1|12/1947|12/1947|

A12