metadata: authors: 0: author: Horn,Sebastian
1: author: Reinhart,Carmen M.
2: author: Trebesch,Christoph
count: World
docna: 0: docna: Coping with Disasters : Two Centuries of
            International Official Lending
docty: Policy Research Working Paper
subtopic: Armed Conflict,Natural Disasters,Investment and Investment Climate,Financial Structures,Financial Sector Policy
teratopic: Macroeconomics and Economic Growth,Environment,Conflict and Development,Finance and Financial Sector Development
abstracts: cdata!: Official ending is much larger than
            commonly known, often surpassing total private cross-border
            capital flows, especially during wars, financial crises and
            natural catastrophes. This paper assembles the first
            comprehensive long-run dataset of official international
            loans, covering 230,000 loans, grants and guarantees
            extended by governments, central banks, and multilateral
            institutions in the period 1790–2015. Historically, wars
            have been the main catalyst of government-to-government
            lending. The scale of official credits granted in and around
            WW1 and WW2 was particularly large, easily surpassing the
            scale of total international bailout lending after the 2008
            crash. During peacetime, development finance and financial
            crises are the main drivers of official cross-border
            finance, with official flows often stepping in when private
            flows retrench. In line with predictions of recent
            theoretical contributions, this paper finds that official
            lending increases with the degree of economic integration.
            In financial crises, governments help those countries to
            which they have greater trade and banking exposure, hoping
            to reduce the collateral damage to their own economies.
            Since the 2000s, official finance has made a sharp comeback,
            largely due to the rise of China as an international
            creditor and the return of central bank cross-border lending
            in times of stress, this time through swap lines.
repnme: repnme: Coping with Disasters : Two Centuries of
            International Official Lending
display_title: Coping with Disasters : Two
            Centuries of International Official Lending
listing_relative_url: /research/2021/04/32972464/coping-disasters-two-centuries-international-official-lending
topicv3: Political Violence and War m1327310 2462,Central Banks m1327453 1235,Financial Sector Development m1327681 1920,Natural Disaster m1503325 3138,Investment Entry m1504647 2544
publishtoextweb_dt: 2021-04-05T00:00:00Z
dois: 10.1596/1813-9450-9612
historic_topic: Macroeconomics and Economic Growth,Environment,Conflict and Development,Finance and Financial Sector Development
origu: Off of Sr VP Dev Econ/Chief Econ (DECVP)
no_of_pages: 68
author_keys: 0: author_key: 124384
model_extractions: Policy Research Working Paper 9612 Coping with Disasters Two Centuries of International Official Lending _Sebastian Horn Carmen M. Reinhart Christoph Trebesch_ Development Economics Vice Presidency Office of the Chief Economist April 2021
Policy Research Working Paper 9612

# **Abstract**

Official ending is much larger than commonly known, often surpassing total private cross-border capital flows, especially during wars, financial crises and natural catastrophes. This paper assembles the first comprehensive long-run dataset of official international loans, covering 230,000 loans, grants and guarantees extended by governments, central banks, and multilateral institutions in the period 1790–2015. Historically, wars have been the main catalyst of government-to-government lending. The scale of official credits granted in and around WW1 and WW2 was particularly large, easily surpassing the scale of total international bailout lending after the 2008 crash. During peacetime, development finance and financial crises are the main drivers of official cross-border finance, with official flows often stepping in when private flows retrench. In line with predictions of recent theoretical contributions, this paper finds that official lending increases with the degree of economic integration. In financial crises, governments help those countries to which they have greater trade and banking exposure, hoping to reduce the collateral damage to their own economies. Since the 2000s, official finance has made a sharp comeback, largely due to the rise of China as an international creditor and the return of central bank cross-border lending in times of stress, this time through swap lines.

This paper is a product of the Office of the 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 sebastian.horn@econ.lmu.de; carmen_reinhart@harvard.edu or creinhart@worldbank.org; 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
# Coping with Disasters:

# Two Centuries of International Official Lending<sup>1</sup>

## Sebastian Horn

_University of Munich and Kiel Institute for the World Economy_ Carmen M. Reinhart _Harvard University & World Bank_

## Christoph Trebesch

_Kiel Institute for the World Economy_ _JEL_ : E42, F33, F34, F35, F36, G01, G20, N1, N2 _Keywords:_ Capital flows, disaster response, global safety net, bail-outs

> 1 We thank Erik Eichler, Leonard Rosen and Robert Yee for excellent research assistance as well as the German Research Foundation (DFG) for financial support (SPP 1859). Sebastian Horn gratefully acknowledges financial support from the Egon Sohmen Graduate Center at LMU Munich. Contact: sebastian.horn@econ.lmu.de; carmen_reinhart@harvard.edu or creinhart@worldbank.org; christoph.trebesch@ifw-kiel.de.
# **1. Introduction**

The world of official (bilateral and multilateral) lending remains largely unexplored in the academic literature, despite the scale and relevance of this type of cross-border flows. Most studies focus on a single government or institution, such as US lending as part of the Marshall Plan or IMF bailouts during the Asian Crisis. Compared to the vast literature on private cross-border flows, research on official international financial flows has been limited by a lack of systematic data. Existing datasets on official debt and inter-governmental lending typically have a much narrower focus (i.e. on development aid, concessionary lending) or they start only in the 1970s.

We collect data on the lending transactions of 134 creditor countries and 56 international and regional financial organizations across 200 years, building on hundreds of sources, including international treaties, budget accounts, proprietary lending data by the World Bank, and archival material. In total, we identify more than 230,000 official loans, grants and guarantees from 1790 to 2015, with total commitments amounting to more than 15 trillion US Dollars (in constant 2015 terms). Using this data, we document the characteristics of official capital flows, link it to the occurrence of disasters (wars, financial crises and natural disasters), and study its determinants with a gravity model of bilateral lending since the 18<sup>th</sup> century. Our main findings can be summarized as follows.

Official lending by governments, central banks, and multilateral institutions is larger than commonly known. Indeed, over the past two centuries, official creditors have played a major role in international finance. Since 1800, official capital flows have repeatedly exceeded private cross-border flows. This is especially true during times of war, financial crises, or other disasters, when private flows decline and official actors become the chief international lenders.

The biggest surges in official lending occurred during major wars, in particular in WW1, WW2 and the Napoleonic wars. The amounts lent during these global conflicts were a multiple of the loans made during global financial crises or major natural disasters. This adds perspective to modern debates on the international financial system, as there is a tendency to think of official finance as a complementary type of capital flows in the context of development aid and crisis bailouts. But this view reflects the fact that much of the world has enjoyed 70 years of peace. Global wars have been the most disruptive force in international finance.

In peacetime, the main driver of official international lending was and continues to be financial crises. We show that international rescue lending has a long history, occurring repeatedly during banking panics and currency crises of the 19<sup>th</sup> and early 20<sup>th</sup> century, well before the creation of the IMF. The rescue loans extended in global crises were substantial, e.g. in the crises of 1861 or 1890, but these bailouts were ad hoc and aimed at bridging short-term liquidity problems. In contrast, since 2
WW2, financial crisis lending has become much more institutionalized and “serial” bailouts to highly indebted countries have become more common. This is partly the result of the rise of international and regional financial institutions, in particular the IMF and the World Bank. Lending by these multilateral creditors overtook total bilateral lending for the first time in the 1970s.

By comparing our novel data on official flows with previously assembled long-run data on private international capital flows by Reinhart, Reinhart and Trebesch (2019) we show that both series are negatively correlated. Official capital flows are highest when private capital flows dry out. During wartime, private investors usually face widespread capital controls, while governments lend at record pace, not just via domestic “buy war bonds” campaign, but also internationally. Furthermore, the data show that official creditors were the “only game in town” during the Bretton Woods era in the 1950s and 1960s, while private cross-border capital flows were scarce and heavily curtailed. An expanded official role is also evident during the height of the Great Depression in the 1930s and during the 2008 global financial crisis and its aftermath on periphery Europe, when central bank and sovereign lending spiked, while private capital outflows reversed.

It is not widely appreciated that we witnessed a comeback of official lending in the past two decades. China’s rise as an international creditor has been underestimated due to a lack of data and transparency. We document how China has become one of the most important official creditors worldwide, as almost all of its foreign lending is extended by the government and its state-owned banks (see also Horn, Reinhart and Trebesch 2019). China’s official lending boom is part of a more general rise of new creditor powers, especially emerging markets such as Russia, India, Brazil or the Arab oil states, who have all become active official lenders in varying degrees. In addition, dozens of new official lending institutions were founded since WW2, including a range of regional development banks and regional financial arrangements in Asia, Africa and South America. The result has been a notable increase in “South-South” official sovereign lending. More generally, we find a much higher incidence of official loans in the current era. Today, most financial crises, natural catastrophes and wars are accompanied by official lending of some form. This was not the case historically.

Similarly, we are seeing a resurgence of official financing via central banks. During the financial crisis of 2008 the Federal Reserve Bank, the ECB and the Bank of Japan granted record amounts of “swap lines” via a network of standing credit lines that allow drawing overnight foreign currency loans (Bahaj and Reis 2019). These developments are reminiscent of the flourishing crossborder central bank lending during the gold standard era pre-WW1 and in the interwar years. The newly resurrected and intensely used Federal Reserve swap lines during the Covid-19 pandemic is yet another example.

3
On the determinants of official flows, our results are consistent with the predictions of recent theoretical contributions. Tirole (2015), Fahri and Tirole (2018) and Gourinchas, Martin and Messer (2019) all predict the scope of bilateral official lending and bailouts to increase with economic and financial integration. When the negative spillovers from a crisis country are potentially high, e.g., due to close bank and trade linkages, countries have an incentive to grant rescue loans to the government facing the crisis. In so doing, creditor governments aim to reduce the collateral damage to their own economy.

Until now, it was difficult to test these priors systematically, due to data limitations. We connect the models and narratives in this literature to our new database. We estimate an augmented gravity model of bilateral official loans worldwide and across crises and disasters of the past two centuries (including more than 1700 dyads). We find that bilateral trade and bilateral bank exposure are indeed a key predictor of official lending flows in crisis times. Across all eras, countries were most willing to help others when private agents had significant economic or financial exposure in the recipient countries. The prevailing interpretation is that foreign official lending is a function of economic and political self-interest, rather than of altruism or more general “country solidarity”. At the same time, official flows seem to be impeded by informational asymmetries, as the likelihood of rescue lending decreases significantly with higher geographic and cultural distance.

Our paper adds a significant missing piece to the literature on capital flows and the international monetary system. Research in this broad topic has almost exclusively focused on private capital flows (see, for example, Calvo, Leiderman and Reinhart 1993, Stone 1999, Obstfeld and Rogoff 2000, Obstfeld and Taylor 2004, Lane and Milesi-Ferretti 2007, Bruno and Shin 2013, Gourinchas and Jeanne 2013, Rey 2015, and Reinhart, Reinhart and Trebech 2017). In contrast, there is only very little research on official capital flows (among the few exceptions is the pioneering work on official finance by Alfaro, Kalemli-Ozcan and Volosovych 2014, as well as some of our own work in Reinhart and Trebesch 2016 and Schlegl, Trebesch and Wright 2019). Given the size of official capital flows, both in the past and most recently, omitting official lending distorts the picture on the size and dynamics of international capital flows. The omission is most problematic during natural disasters, economic crises and war.

Our analysis also contributes to the literature on macroeconomic disasters (e.g. Barro 2006, Barro and Ursua 2008, Gabaix 2012) and on the economics of international wars (e.g. Martin, Mayer and Thoenig 2005, Glick and Taylor 2010), by combining our dataset on official flows with data on inter-state conflicts, natural disasters and financial crises. Not unlike the literature on capital flows, economic research on disasters and wars has focused primarily on the implications for private capital markets and trade. We show that over the past 200 years, official lending repeatedly reached record 4
heights during some macroeconomic disasters and all global wars, with large potential consequences for output, trade and asset markets alike (these effects remain largely unexplored).

More generally, our dataset allows us to address fundamental questions of international cooperation in a new way. Why do countries cooperate financially and what are the outcomes? Existing work on economic cooperation between sovereign states mainly focuses on cooperation in the realms of fiscal policy, exchange rate policy, or banking regulation (e.g. the seminal work of Kindleberger 1986, Eichengreen 1992, or James 1996). But, until now, there have been almost no systematic empirical analysis on the determinants of financial cooperation via sovereign-to-sovereign and central-bank-tocentral-bank lending in the past and present, which is the focus here.

Another strand of related literature focuses on financial crises and sovereign debt problems. Countless papers have explored the pricing of privately held sovereign bonds and the determinants and effects of default by sovereign borrowers (see Reinhart and Rogoff 2009, Panizza et al. 2009, Aguiar and Amador 2014 or Meyer, Reinhart and Trebesch 2019 for overviews). In contrast, there has been very little work on _lending_ by sovereigns. The history of official debt has long been overlooked in this research area, except for a body of work on IMF and World Bank lending, which, as we document, only became large in the 1970s and today accounts for a third of total official lending. We contribute to the literature on financial crises by conducting the first long-run study on international official rescue lending during debt, currency and banking crises in both advanced and developing countries.

We thereby considerably expand the existing narratives and data collections on country bailouts, e.g. by Kindleberger (2006), Bordo and Schwartz (1998), Roubini and Setser (2004), Barbku, Eichengreen and Mody (2012) or Corsetti, Erce and Uy (2017, 2018). Our data show that crisis lending has evolved from occasional, ad-hoc rescue loans by allied states to a global financial safety net with dozens of institutions. Besides covering the incidence, origin, and amounts of official lending, we also gathered information on the interest rates and repayment terms, as well as on the political conditions of official support. This data resource will allow further analyses on the determinants, design, and consequences of cross-border bailouts and will help to inform the theoretical literature on international crises (see above, as well as Summers 2000, Bordo et al. 2001 and Lorenzoni 2014, for overviews).<sup>2</sup> By exploring political drivers of bilateral rescue lending we also add to existing work on the political economy of bailouts (Brown and Dinc 2005, Schneider and Tobin 2020).

> 2 A small theoretical literature specifically studies sovereign bailouts across borders, e.g. Corsetti, Guimarães and Roubini 2006, Morris and Shin 2006, Dellas and Niepelt 2016, Fink and Scholl 2016, Corsetti, Erce and Uy 2018, Roch and Uhlig 2018, as well as the references cited above Tirole (2015), Fahri and Tirole (2018) Gourinchas, Martin and Messer (2019).

5
The remainder of the paper proceeds as follows: Section 2 provides information on who lends, tracking official creditors and institutions since 1790. This section also describes our coding and data sources. Section 3 presents our new database and provides a panoramic view on salient features of official sovereign lending across two centuries: We identify the main creditors and the (de jure) purposes of official lending over time and document the time profile of official transfers. In Section 4, we examine the correlation of official flows with private international capital flows. We turn to official lending in times of crises and disasters in Section 5. To do so we compile a new database on the occurrence of different disasters that tracks financial crises, military conflict and severe natural disasters. In Section 6 we explore the determinants of official lending by estimating an augmented gravity model of bilateral rescue loans. Section 7 concludes.

# **2. Measuring official sovereign lending: methodology and sources**

The main challenge to the study of official international lending is the lack of systematic and encompassing data, with most available data not going back any further than the mid-1970s. We therefore embark on a large-scale data collection effort with the objective of constructing the first longrun database on official flows over two centuries. This section offers a sketch of the main elements of our database, while Appendix III provides a much more detailed overview on our sources and coding approach. We define official international lending (conventional definition) as all loans, grants and guarantees extended by a sovereign, supra-sovereign or sub-sovereign creditor entity to a foreign sovereign or non-sovereign debtor. By this definition, official creditors include both bilateral and multilateral institutions, as well as sub-sovereign creditors such as a state-owned export and development banks. Given the relative scarcity of discussion on official lending in history, the next subsection provides a brief background on the universe of official creditor institutions over the past 200 years. This sets the stage for the subsequent description of our data sources.

# **2.1 Official creditors and institutions since 1790**

Figure 1 provides a stylized representation of the evolution of the official creditor universe, distinguishing between bilateral and multilateral institutions. Throughout the 19<sup>th</sup> century and up until the 1920s, official international loans were exclusively extended by bilateral creditors, namely by the treasuries, foreign and colonial offices and war ministries of nations, as well as by national central banks. These institutions were not specialized on providing foreign loans, but took up the task when special circumstances required them to do so, very often under considerable political controversy.

6
Figure 1. The universe of official sovereign creditor institutions 1790 – 2015 Foreign and Colonial Offices Ministries of Development **Bilateral** Export Credit Banks **creditors** Central Banks & Treasuries 1800 1918 1945 1973 2015 League of Nations United Nations System Bank for International Settlements **Multilateral creditors** International Monetary Fund World Bank Regional Development Banks Regional Safety Nets _Sources:_ Official international lending database and Cogan et al. (2016).

The practice of official sovereign lending across borders changed profoundly with the onset of World War I. European sovereigns established a new type of official creditor institution: state-owned export banks that guaranteed private trade credits and directly extended buyer credits to foreign sovereigns, in particular to the Soviet Union that had lost access to private capital markets (Margold, 1934). In addition, the League of Nations, founded in 1920, started to cooperate with national treasuries to mobilize rescue loans for crisis countries in need, especially in Central and Eastern Europe where governments tried to stabilize their currencies after the war (Flores Zendejas and Decorzant 2016). In doing so, they were supported by increasingly active central banks, which extended record amounts of rescue loans to other central banks facing capital and gold outflows in an effort to support the interwar gold standard. This era of central bank cooperation peaked during the crisis of 1931 and quickly receded afterwards. Guided by the newly founded Bank of International Settlements (BIS), central banks mobilized significant emergency credits to Central Europe and Britain to stem the turmoil caused by the retrenchment of private flows, with limited success (Accominotti and Eichengreen 2016).

The crisis of 1931 and its aftermath mark a turning point in the development of official international lending. The crisis highlighted the volatile nature of private capital flows and led leading policy-makers and academics to acknowledge the importance of counter-cyclical official lending (Nurske, 1944). During the course of the 1930s, the United States joined European states in extending 7
official loans to states with balance-of-payments problems, in particular through the US Export-Import Bank and the US Treasury’s Exchange Stabilization Fund, which was established in 1934.

The lessons learned during these operations turned out to have great effect on the design of the post-World War II Bretton Woods System (Bordo and Schwartz, 2001). In 1944, the IMF was founded with the aim of providing short-term official funds to countries with temporary balance-ofpayments problems, alongside with the World Bank that was intended to provide long-term development and reconstruction funds. However, official lending during the post-war decades continued to be dominated by bilateral creditors. The US, in particular, engaged in large scale lending, e.g. via the Marshall Plan and EXIM Bank funds. Also the Soviet Union became an active official lender. Furthermore, outside the convertible dollar and sterling areas, sovereigns financed their current account deficits with the reciprocal extension of clearing credits.

Starting from the late 1950s, the practice of official lending began to gradually shift from bilateral to multilateral creditor institutions, driven by a remarkable increase in the number and variety of multilateral lending institutions. Regional development banks first emerged in the late 1950s with the establishment of the European Development Fund and the Inter-American Development Bank and have spread to all regions of the globe since. In parallel, new Regional Financial Arrangements (RFAs) were set up, typically focused on providing emergency funds during balance-of-payments crisis of member states. Early examples include the European Monetary Agreement founded in 1958 and the Central American Monetary Stabilization Fund of 1970. More recently, the European Stability Mechanism (ESM) founded in 2012, is just one manifestations of this long-run trend towards regional rescue facilities. Beyond regional and multilateral arrangements, central bank swap lines have become an additional main source of official emergency finance. Starting with the defense of the Bretton Woods system in the 1960s, a network of bilateral swap lines has been in place that connects the major central banks of the world. More recently, these networks have been expanded in size and scope. They now include the central banks of main emerging markets and, driven by China’s central bank, also a growing number of developing countries.

Taken together, these institutional developments have transformed the practice of official sovereign lending from occasional instances of ad-hoc cooperation between two states into a multilayered, global financial safety net composed of a broad range of specialized institutions.

# **2.2 Main sources and scope of the database**

Our new database compiles loans, grants and guarantees from the majority of these official creditors and several hundred primary and secondary sources that are described in detail in Appendix III. The resulting database spans official lending from 1790 to 2015 and covers more than 230,000 loans, 8
grants and guarantees extended by national agencies of up to 134 bilateral creditor countries and by 56 different international organizations (see Appendix III for a full list). Whenever available we collected data on the creditor and the borrower, both commitment and disbursement amounts, the purpose of the loan as well as the interest rates and repayment terms. In other cases, our data is more aggregate. At the minimum, however, our database contains creditor and borrower country as well as commitment amounts at the annual level allowing us to identify source and direction of official lending and thus the bilateral patterns of international official flows. We now sketch the main sources used in constructing the database.

_International treaty series:_ Our main source for official lending during the 19<sup>th</sup> century and leading up to World War II are international treaty collections. In doing so, we make use of the fact that the conduct of foreign policy became increasingly formalized in the late 18<sup>th</sup> century, so that international loans between two states were now codified in inter-governmental treaties (Keene 2012). Our sources show that, over the course of the 150 years from 1790 to World War II, sovereigns negotiated thousands of bilateral treaties, in which they regulated their political and commercial interactions. To identify bilateral lending, we systematically search the available treaty collections and related databases for bilateral financial agreements that arrange the extension of loans and grants or that extend guarantees on privately issued international loans or bonds.

_National budget accounts:_ For the main bilateral creditor countries, we supplement the information obtained from international treaties with national budget accounts and plans. In particular, we comb through the national budgets of the United Kingdom starting in 1790, France from 1790, Germany from 1870 and the US starting with its first official, foreign loan in 1917. In addition to providing an important consistency check, these sources allow us to capture within-empire (country) transactions, e.g. lending to colonies, for which no inter-governmental treaties exist.

_Reports and datasets from international organizations:_ Starting from the inter-war period, publications and data by international organizations become an additional, highly valuable source. We make extensive use of regular research reports on international capital flows by the League of Nations, the BIS, the IBRD, the UN, the OECD and the IADB. We also use a wide range of creditor specific sources, such as recently declassified CIA reports on foreign lending by Sino-Soviet Bloc countries and the annual reports of a large number of bilateral and multilateral creditor institutions. Moreover, and most importantly, we supplement this hand-coded data with a comprehensive data-extract on bilateral lending from the World Bank's Debtor Reporting System (DRS), which was shared with us on a confidential basis. Specifically, the DRS records all bilateral lending transactions of all member states reporting to the World Bank, starting in the 1960s. For aid flows and grants, our main sources are the 9
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overview and to motivate our more systematic analysis of official lending during disasters in sections 4 and 5.

Figures 3 and 6 illustrate that, during the 19th century and up to World War I official sovereign lending was heavily concentrated in times of major wars. Notable lending surges occured during the French Revolutionary Wars, the Napoleonic Wars and the First Crimean War. In each case the Great European Powers provided substantial financial support to their allies by means of loans, guarantees and grants. Similarly, during the Latin American Wars of Independence the newly founded republics cooperated financially through the extension of loans and grants in an effort to win against Spain. With respect to financial crises, there were repeated instances of official rescue lending during banking panics, through reciprocal credits between central banks (see below and Eichengreen 1992, James 1996). In contrast, there are only few cases of official lending during sovereign debt crises, e.g. the official guarantees on private bonds issued by Greece in 1832 and 1898. Sovereign defaults were more commonly left to market forces or solved through enforced adjustments in the form of supersanctions (Mitchener and Weidenmier 2010, Tuncer 2015). Moreover, prior to World War I, we found few instances of official lending in response to natural disasters or famines and also official lending for development purposes was very limited throughout the 19<sup>th</sup> century, with the exception of transactions within empires, where grants and loans were occasionally used to build infrastructure and to contain the negative effects of military conflict, e.g. in Transvaal after the Second Boer War.

During the first half of the 20th century, the two World Wars stand out, leading to historically unprecedented levels of international assistance. Interestingly, however, the aftermaths of the two wars look very different. After World War I, official flows quickly dried up, with only modest lending for relief and reconstruction. In contrast, after 1945, official lending remained strong over the course of the entire Bretton Woods era. US bilateral loans, in particular, played a crucial role in the closing of the Dollar Gap and the reconstruction of Europe (mostly connected with the Marshall Plan). This period - from the break-down of the inter-war gold exchange standard in 1931 to the late 1960s - can be considered the heyday of official finance. With wide-spread capital controls on private flows and financial repression, official loans constituted the only feasible means of international capital transfers.

With the collapse of the Bretton Woods System and the steady rise in private capital mobility, the purpose of official lending changed again. There are increasing financial flows to finance domestic development and infrastructure projects in developing countries. These countries often lack access to international private capital markets, so that official lending in the form of aid is often the only source of foreign savings. Figure 6 shows that the scale of official flows for development finance has remained remarkably stable over the past decades. In contrast, official flows to advanced and emerging economies are more volatile, driven mainly by economic and political crises. Indeed, it is the incidence of major 15
<!-- Start of picture text --> a,<br>5<br>5<br>° in percent of US GDP thereafter<br>= 10% In percent ofBritish GDP until 1914,<br>5<br>§<br>fas}<br>&<br>aa<br>fe)<br>x<br>£ 5%<br>5<br>fe)<br>5<br>g<br>~)<br>0<br>1790 1815 1840 1865 1890 1915 1940 1965 1990 2015<br>[EN Official loans [EE Central Bank swaps and credits<br><!-- End of picture text -->
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<!-- Start of picture text --> TM in percent of US GDP thereafter Official international<br>ra 10% In percent of British GDP until 1914,<br>os lending<br>Ss ao<br>3 Private capital<br>5) flows<br>& 50%<br>a oe \<br>—<br>fe)<br><<br>‘5<br>0<br>1790 1815 1840 1865 1890 1915 1940 1965 1990 2015<br>HE Official commitments<br>——— Private capital flows (RRT)<br><!-- End of picture text -->
# **4. Official lending in wars, financial crises and natural disasters**

In this section, we match our data on official sovereign lending with data on the occurrence of disasters, more specifically of wars, financial crises and severe natural catastrophes such as earthquakes. This allows us to study the international response to crises across different eras of the international financial system. We begin by compiling a comprehensive database on disaster and crisis events in the past 200 years and then match this with our novel dataset on official lending.

# **4.1 Identifying disasters and defining crisis events**

To identify financial crises, military conflicts and severe natural disasters, we make use a variety of sources. This section provides an overview, while details are described in Appendix I. Our approach focuses on actual disaster dates and events, in contrast to a related macroeconomic literature that defines “macroeconomic disasters” as drops in consumption or GDP beyond a specific threshold (see Barro and Ursua 2010). The advantage of using event data is that it allows for much broader geographic and time coverage, given that long-run consumption and GDP data is only available for advanced countries and a few select emerging market countries. Furthermore, event-based data allows for a more granular analysis, e.g. by differentiating between different types of shocks and disasters.

To identify _financial crises_ , we rely on the data of Reinhart and Rogoff (2009), and the data update by Meyer et al. (2019). We consider banking, currency and external sovereign debt crises and follow the crisis definitions brought forward by Reinhart and Rogoff (see Appendix I).

Our definition of _wars_ follows the Correlates of War (CoW) project, namely a sustained combat, involving organized armed forces and resulting in a minimum of 1000 battle-related fatalities over the course of a 12 months period (Sarkees and Wayman 2010). The CoW data collection distinguishes interstate and intra-state conflict, both of which are included as disaster events here. International or interstate conflicts are defined as wars between two or more territorial states that are members of the international state system. Intra-state (or civil) wars are defined by sustained military combat within a state and with active participation of the national government. In the CoW database, war begins with the onset of sustained military combat ́, irrespective of a formal declarations of war.

Measuring _natural disasters_ and the resulting damages and casualties over 200 years is challenging. To build a long-run dataset we draw on a large number of sources. First and most importantly, we draw on the EM-DAT International Disaster Database, which contains information on several thousand natural disasters around the globe since 1900, including geophysical (earthquakes and volcano eruptions), meteorological (extreme temperatures and storms), hydrological (floods and landslides), climatological (droughts, famines and wildfires) and biological disasters such as epidemics.

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To expand the data coverage to the 19th century, we supplement this source with information from the National Center for Environmental Information, which lists events of earthquakes, volcano eruptions, floods, tsunamis, and storms going back until 1800. In addition, we make use of numerous historical and country studies on famines and epidemics during the 19th century, as listed in Appendix I.

Table 1. Number of disaster events in different eras: 1800-2015

|1800 - 1913<br>Long 19th Century|1914 - 1945<br>Inter-War Period|1946 - 1973<br>Bretton Woods|Modern Era<br>1973 - 2015|
|---|---|---|---|
|Financial crises<br>254|235|164|416|
|Severe natural<br>disasters<br>44|28|20|16|
|Military conflict<br>157|70|104|154|
|Total number of<br>disaster events<br>455|333|288|586|

_Sources:_ See text and Appendix I for details.

The resulting dataset identifies several thousand natural disasters since 1800. Given our focus on disasters that warrant the provision of international financial assistance, we focus only on the most severe events. To do so, we match our list of natural disasters with population data from Mitchell (2007) and include only those natural disasters that result in casualties of at least 0.1 percent of the population. This yields 108 severe natural disaster events over the course of the past 200 years. While the timing of the disaster event is straight-forward with respect to earthquakes, floods or hurricanes, it can be difficult to accurately measure the duration of famines and epidemics. For these episodes, we consider the initial two years of the outbreak.

Table 1 summarizes the number of disasters and their frequency across different eras. Figure 11 also plots the incidence of disasters but takes a different perspective. It shows the share of independent countries that experience war, enter financial crises or suffer from severe natural disasters in any given year since 1800 based on our sample. Figure 10 reveals that the time-variation in the number of disasters is primarily driven by the waves of financial crises and military conflict that are spatially correlated. In contrast, the occurrence of severe natural disaster events is less cyclical and fairly constant over time.

Figure 11. Incidence of wars, crises and natural disasters 1800 – 2010 21
<!-- Start of picture text --> 60%<br>6<br>Bg<br>SS<br>ie)<br>o<br><¢ 40%<br>3<br>fa<br>o<br>a<br>o<br>cs<br>&<br>I<br>2 20%<br>=<br>3<br>ovo<br>a<br>&<br>0<br>1800 1830 1860 1890 1920 1950 1980 2010<br>HE Countries experiencing severe natural disasters<br>EE Countries entering financial crises<br>HE Countries at war<br><!-- End of picture text -->
Table 2. Natural disasters and their official international response: selected cases, 1800-2015

|**Natural disaster**|**Year**|**Main**<br>**recipient(s)**|**Main**<br>**donor(s)**|**Official assistance**<br>(in real 2015 USD<br>and as % of recipient<br>GDP or imports)|
|---|---|---|---|---|
|Famine|1811 – 1813|Portugal, Russia|United Kingdom|$ 27 mn|
|Caracas Earthquake|1812|Venezuela|USA|$ 1 mn|
|Hurricane|1836|Dominica|United Kingdom|$ 1.2 mn|
|Volcano eruption,<br>earthquakes|1843|Antigua, Montserrat|United Kingdom|$ 21 mn|
|Eruption of Mount<br>Pelée|1902|Martinique|United Kingdom,<br>France|$ 14 mn|
|Famine|1913|Albania|United Kingdom|$ 0.2 mn|
|Famines<br>(following WWI)|1919 – 1923|Europe|USA, UK,<br>France, Norway|$ 12 bn|
|Jericho Earthquake|1927|Transjordan|United Kingdom|$ 1.4 mn|
|Flood|1949|Guatemala|US, Cuba|$ 46 mn<br>7 % of imports|
|Valdivia<br>Earthquake|1960|Chile|IMF, IBRD, US|$ 6 bn<br>12 % of GDP<br>230 % of imports|
|Famine|1983 – 1985|Ethiopia|UN, IDA, Soviet<br>Union|$ 4 bn<br>27 % of GDP<br>260 % of imports|
|Cyclone|1991|Bangladesh|UN, IDA, G-7<br>countries|$ 4.3 bn<br>8 % of GDP<br>68 % of imports|
|Tsunami|2004|Sri Lanka|UN, IDA, Japan,<br>China|$ 3 bn<br>14 % of GDP<br>45 % of imports|
|Earthquake|2010|Haiti|UN, IADB, US,<br>France|$ 6 bn<br>90 % of GDP<br>200 % of imports|

_Note:_ This table shows the scale of official rescue lending in selected severe natural disasters of the past 200 years. The size of official assistance is given in real 2015 US Dollars. Whenever data availability permits, we show the magnitude of assistance in percent of recipient GDP and imports (using pre-disaster values).

23
Table 3. **Military conflicts** and their international response: selected cases, 1800 - 2015

|**Military**<br>**conflict**|**Year**|**Main**<br>**recipient(s)**|**Main**<br>**donor(s)**|**Official assistance**<br>(in real 2015 USD<br>and as % of recipient<br>GDP or imports)|
|---|---|---|---|---|
|French|||||
|Revolutionary<br>Wars|1792 - 1802|Austria, Prussia|United Kingdom|$ 2 bn|
|Napoleonic Wars|1803 – 1815|Austria, Prussia,<br>Russia, Portugal,<br>Sweden|United Kingdom|$ 5 bn|
|Crimean War|1853 – 1856|Sardinia,<br>Ottoman Empire|United Kingdom,<br>France|$ 950 mn|
|1<sup>st</sup>Sino-Japanese<br>War|1895|China|France, Russia|$ 2.1 bn<br>0.5 % of GDP<br>66 % of imports|
|World War I|1914 - 1918|UK, France, Russia|US, UK, France|$ 475 bn|
|2<sup>nd</sup>Sino-Japanese<br>War|1935 - 1938|China|USA, Soviet<br>Union|$ 2.7 bn<br>22 % of GDP<br>135 % of imports|
|Spanish Civil<br>War|1936|Spain|Germany, Italy,<br>Soviet Union|$ 12.5 bn<br>11 % of GDP<br>256 % of imports|
|World War II|1939 – 1945|UK, Germany,<br>Soviet Union|USA|$ 800 bn|
|Vietnam War|1956 – 1975|South Vietnam|USA|$ 150 bn|
|||||$ 2.6 bn|
|Yom-Kippur War|1973|Israel|USA|4 % of GDP<br>20 % of imports|

_Note:_ This table shows the scale of official rescue lending in selected severe wars and military conflicts of the past 200 years. The size of official assistance is given in real 2015 US Dollars. Whenever data availability permits, we further show the magnitude of assistance in percent of pre-disaster recipient country GDP and imports.

Table 4. **Financial crises** and their international response: selected cases, 1800 - 2015 24
|**Financial**<br>**crisis**|**Year**|**Main**<br>**recipient(s)**|**Main**<br>**donor(s)**|**Official assistance**<br>(in real 2015 USD and as % of<br>recipient GDP or imports)|
|---|---|---|---|---|
|Panic of 1925|1825|United Kingdom|France|$ 45 mn<br>0.7 % of GDP<br>1% of imports<br>$ 290 mn|
|Banking Crisis|1846|France|United Kingdom|0.6 % of GDP<br>6 % of imports|
|World Economic<br>Crisis|1857|Hamburg|Austria|$ 150 mn<br>2 % of imports|
|Baring Crisis|1890|United Kingdom|France, Russia|$ 575 mn<br>0.2 % of GDP<br>1 % of imports|
|Panic of 1907|1907|United Kingdom|France|$ 390 mn<br>0.1 % of GDP<br>0.5 % of imports|
|Post WWI<br>Stabilization|1919 – 1923|Austria|UK, France,<br>League of Nations|$ 5.7 bn<br>22 % of GDP<br>135 % of imports|
|Currency<br>stabilization|1927|Italy|Consortium of 16<br>Central Banks|$ 1 bn<br>0.5 % of GDP<br>7.2 % of imports|
|Crisis of 1931|1931|Germany|France, UK, USA,<br>BIS|$ 8 bn<br>2 % of GDP<br>20 % of imports|
|Crisis of 1931|1931|United Kingdom|France, USA|$ 19 bn<br>4 % of GDP<br>24 % of imports|
|Currency & debt<br>crisis|1934 – 1937|Brazil|USA|$ 1.5 bn<br>2 % of GDP<br>50 % of imports|
|Dollar Gap &<br>Reconstruction of<br>Europe|1946 – 1952|Western Europe|USA|$ 280 bn<br>-|
|Currency & debt<br>crisis|1956|Hungary|Soviet Union,<br>China|$ 2.7 bn<br>4 % of GDP<br>94 % of imports|
|Defense of<br>Sterling|1964|United Kingdom|IMF, BIS, G-10|$ 30 bn<br>5 % of GDP<br>30 % of imports|
|First Oil Crisis|1974 – 1976|Italy||25<br>$ 23 bn|
||||IMF, EEC,<br>Germany|3 % of GDP<br>25 % of imports|
|---|---|---|---|---|
|Developing<br>Country Debt<br>Crisis|1982 – 1983|Brazil|IMF, IBRD, IADB,<br>Germany, USA|$ 33 bn<br>5 % of GDP<br>50 % of imports|
|Tequila Crisis|1994 – 1995|Mexico|IMF, USA|$ 76 bn<br>10 % of GDP<br>68 % of imports|
|Asian Crisis|1997|Thailand|IMF, Korea, Japan|$ 18 bn<br>7 % of GDP<br>16 % of imports|
|Great Financial<br>Crisis|2008 – 2010|Ukraine|IMF, EU, USA|$ 50 bn<br>31 % of GDP<br>65 % of imports|
|Eurozone Debt<br>Crisis|2010 - 2015|Greece|Eurozone, IMF|$ 450 bn<br>144 % of GDP<br>550 % of imports|

_Note:_ This table shows selected official rescue packages during financial crises of the past 200 years. The size of official assistance is given in real 2015 US Dollars. Whenever data availability permits, we further show the magnitude of assistance in percent of pre-disaster recipient country GDP and imports.

Generally, the cases illustrate that the amounts of official lending have increased over time, both in absolute terms and as percent of recipient GDP or imports. This is particularly true for international bailouts in financial crises. Notable examples include the Sterling Crisis of 1964 in which the UK received USD 30 billion (5% of GDP), the Tequila Crisis of 1994/95 in which Mexico received USD 76 billion (10% of GDP), as well as the recent bailouts of Ukraine after 2008 (50 billion USD, or 31% of GDP) and Greece after 2010 (Greece received a whopping 450 billion USD or 375 billion Euro in bailouts, corresponding to 144 % of Greek GDP, see Reinhart and Trebesch 2016).

We continue our analysis with a more systematic analysis on the incidence of international rescue lending during disasters, focusing on the overlap between the two. Figure 12 shows the share of independent countries that experienced disasters (black line) as well as the subset of these countries that received international official assistance at the same time (grey shaded areas). The figure considers financial crisis, natural catastrophes and military conflict as defined above.

Figure 12. Incidence of official rescue lending in disasters (all types, 1800-2015) 26
<!-- Start of picture text --> 40%<br>$ 30%<br>7 &<br>38<br>+ 2<br>=o<br>3e<br>55 20%<br>= 6<br>a2<br>o<br>3<br>&<br>10%<br>0<br>1800 1830 1860 1890 1920 1950 1980 2010<br>— Countries experiencing disasters<br>[ Countries experiencing disasters and receiving foreign assistance<br><!-- End of picture text -->
<!-- Start of picture text --> Panel A: All financial crises Panel B: Sovereign Debt Crises<br>» 40% 2 10%<br>SE 30% se<br>a) =?<br>co coo<br>22 20% 22 5%<br>og s2<br>az az<br>Sa 10% Se<br>1800 1830 1860 1890 1920 1950 1980 2010 1800 1830 1860 1890 1920 1950 1980 2010<br>Panel C: Severe natural disasters Panel D: Wars<br>» 4% » 30%<br>2 2<br>se Se<br>2a8 Se.=5 10%<br>3 3<br>1800 1830 1860 1890 1920 1950 1980 2010 1800 1830 1860 1890 1920 1950 1980 2010<br>— Share of countries experiencing disasters<br>[5555 Share of countries experiencing disasters and receiving foreign assistance<br><!-- End of picture text -->
<!-- Start of picture text --> one t FH. - §<br>~ Whe — Ze * = 2<br>‘i 7S Cao? hae<br>v<br><!-- End of picture text -->
<!-- Start of picture text --> Panel A: Trade exposure and official lending Panel B: Banking exposure and official lending<br>(1800 - 2015) (1984- 2015)<br>15 15<br>a=] “ae =<br>5 10 Beta coefficient: 0.48 «toe “ i. a = 10 Beta coefficient: 0.28 . Le<br>z 5 | + + i MM 25) yt an eeRa<br>FE of 7 See 3 = 0 aN N See<br>z ° oe thet sgovestiatu’. ° 8 oot x, ” “2 8: ees :<br>oD . moet pe I fren ont, 7 ra} * oe, — t “ee .<br>2 -5 mee ae Bet<br>4 . . eee. pam]3 -5 . eo<br>-10 -10<br>-15 -10 -5 0 -15 -10 -5 0<br>Log trade share Log BIS bank exposure share<br><!-- End of picture text -->
<!-- Start of picture text --> Panel A: Geographic distance and official lending Panel B: UN voting and official lending<br>(1800 - 2015) (1946-2015)<br>15 15<br>2 Beta coefficient: -0.70 ss 2 Beta coefficient: -1.61<br>3104 .. . rarer’ S 10 . ore<br>& Me ety BP ot 2°08 ots . & * foe “oe. Soe Pag Saae<br>— minting SE Seat mare 3. g nr alpnta ste ae<br>5 ot © gt Be Se ai eres ir” 2 3 : PR nero. a nS<br>2 a oY tute aes 7} A od: pare _ . * % eye “2 eee rm See<br>5 07 «1 sbt. Sak Soper Game + 5 0 LU SRR<br>= RECESS. sD = . pe og. ee 3°<br>35 . _ . . oye “git ‘ Mies! . 3 . i 2B OS; .<br>* * . #<br>-10 -10<br>6 8 10 -2 -1 0<br>Log distance Log UN voting similarity<br><!-- End of picture text -->
<!-- Start of picture text --> In(RescueLoan<br><!-- End of picture text -->

|)+6In(PoliticalAllegiance<br>)|
|---|
be biased. Furthermore, the large number of zeros in the dependent variable leads to a truncated sample under log-transformation (Head and Mayer 2014). A common solution is to employ a Poisson Pseudo Maximum Likelihood (PPML) estimator that has the desirable properties of being consistent under heteroskedastic error terms and that naturally incorporates zero observations (Head and Meyer 2014). PPML can be used to estimate the parameters of a constant elasticity model in its multiplicative form and thus avoids the dropping of zeros. Santos Silva and Tenreyro (2006) further show that the PPML estimator leads to the same set of first-order conditions as an efficient and consistent non-linear least square estimator. For the PPML estimator to be consistent and efficient, it is therefore not necessary for the data generating process to follow a Poisson likelihood function.

Table 5: Gravity models of bilateral rescue lending: Full sample (1800-2015) and by era

|||<br>Dep. var|<br>iable: Bilateral rescu|<br>e lending||
|---|---|---|---|---|---|
||Full Sample<br>1800 - 2015<br>(1)|Pre-WWII<br>1800 - 1945<br>(2)|Bretton Woods<br>1946 - 1973<br>(3)|Modern Era<br>1973 - 2015<br>(trade linkages) <br>(4)|Modern Era<br>1984 - 2015<br> (banking linkages)<br>(5)|
|Trade exposure|0.34***|0.99*|0.32**|0.50***||
||(0.10)|(0.54)|(0.15)|(0.12)||
|Financial exposure|||||0.26***<br>(0.06)|
|Distance|-0.35**|-0.95**|-0.63**|-0.30*|-0.55***|
||(0.15)|(0.48)|(0.28)|(0.18)|(0.17)|
|UN voting|||6.60***|2.54**|5.44**|
||||(1.45)|(1.25)|(2.41)|
|(Former) colony|1.12***|1.37***|1.53***|0.69***|1.18***|
||(0.29)|(0.46)|(0.34)|(0.26)|(0.22)|
|Constant|9.67***|7.10|8.25***|0.67|-0.43|
||(1.26)|(4.63)|(2.65)|(1.53)|(1.92)|
|Observations|15429|449|1736|12042|1283|
|R-squared|0.825|0.997|0.921|0.730|0.961|
|Creditor FE||||||
|Debtor FE||||||
|Episode FE||||||
|Controls||||||

_Note:_ Poisson Pseudo Maximum Likelihood regressions using gross bilateral commitments during crises, wars and disasters as dependent variable (in real USD.) All explanatory variables enter as pre-crisis values. The models include creditor, debtor and disaster fixed effects. Robust standard errors are clustered at the creditordebtor dyad. ***, **, and * indicate statistical significance at the 1%, 5% and 10% level. See Table A2 in the Appendix for a list of included countries.

33
Table 5 shows the results of the PPML regressions for the full sample as well as for sub-samples in different eras of the international financial system. In line with our main hypothesis, bilateral economic and financial exposure is significantly correlated with bilateral rescue lending across all subsamples, both when using measures of trade and banking linkages. The same is true for political allegiances (UN voting similarity, post-WWII) and for the importance of a shared colonial history. We also find that geographic distance is a statistically significant predictor of bilateral rescue lending. It enters all regressions models with a negative coefficient and thus suggests that informational asymmetries and enforcement issues play an important role in impeding official financial lending in crisis times.

Table 6. Gravity models of bilateral rescue lending: Different econometric models

||Dep. v|ariable: Bilateral rescue l|ending|
|---|---|---|---|
||Probit<br>(1)|OLS<br>(2)|PPML<br>(3)|
|Trade exposure|0.24***<br>(0.03)|0.40***<br>(0.06)|0.43***<br>(0.10)|
|Distance|-0.13*<br>(0.07)|-0.46***<br>(0.13)|-0.29*<br>(0.15)|
|UN voting|-0.34<br>(0.41)|1.59***<br>(0.57)|3.77***<br>(0.71)|
|Former colony|0.35***<br>(0.13)|1.67***<br>(0.21)|0.92***<br>(0.20)|
|Constant|3.08**|-0.99|6.64***|
||(1.30)|(1.23)|(1.17)|
|Observations|13778|3639|13778|
|R-squared||0.600|0.742|
|Creditor FE||||
|Debtor FE||||
|Episode FE||||
|Controls||||

_Note:_ The dependent variable in the probit model is a dummy variable indicating the provision of a bilateral rescue loan, the dependent variables in the OLS and PPML model are log real bilateral commitments. All explanatory variables enter as pre-crisis values. All three models include creditor, debtor and episode fixed effects. Robust standard errors are clustered at the creditor-debtor dyad. ***, **, and * indicate statistical significance at the 1%, 5% and 10% level. See appendix table A2 for a list of included countries.

34
Table 6 confirms the main results by focusing on the post-WWII sample and comparing the PPML estimation results with those of OLS and Probit models. In all three columns, bilateral trade exposure emerges as a key predictor of official rescue lending during crisis and disasters, both in terms of statistical significance and in terms of coefficient size. Specifically, in the probit model, an increase in bilateral trade exposure by one percent is associated with a 0.24 percentage point increase in the likelihood of a rescue loan. In the OLS model, an increase in trade exposure by one percent is reflected in a 0.40 percent increase in real commitment amounts. And finally, in the PPML model that captures both the intensive as well as the extensive margin, the estimated elasticity of rescue lending to bilateral trade exposure is 0.43 and statistically significant. The different models also show similar results with respect to distance, shared culture, and political allegiance (UN general assembly voting).

Taken together, our results reveal persistent patterns of financial rescue lending during disasters. The statistical significance and quantitative importance of bilateral trade and financial exposure suggests that official flows follow private flows. Countries seem to be most willing to cooperate financially, when private agents have significant “skin in the game” in the form of real economic or financial exposure to the crisis country. This finding points towards a substantial element of economic self-interest in financial cooperation across all eras of the international financial system. Cooperation is most likely to emerge during contagious crises and between closely integrated economies. A less charitable restatement is that smaller poorer countries with more limited spillover potential across borders are likely to receive less official finance even if their disasters are just as severe.

At the same time, cooperation seems to be impeded by informational asymmetries, as the likelihood of rescue lending decreases significantly with higher geographic and cultural distance. Besides economic exposure, political allegiance can help in overcoming these frictions.

# **6. Conclusion**

This paper quantifies and studies the scope and determinants of official, sovereign-to-sovereign lending over the past two centuries, based on an encompassing new database. We show that cross-border official lending has been an important force in international finance both in the previous two centuries and today. Official lending tends to spike during wars and severe financial crises with the most notable episodes in World Wars 1 and 2, under Bretton Woods and in the 1930s Depression.

Official cross-border loans and bailouts have also become much more institutionalized. Dozens of new official creditor institutions have been created since the 1970s, including, regional development banks. At the same time, bilateral and multilateral institutions lending continue to play an important role 35
while central banks have become much more active again in lending to their counterparts across borders. Few, if any, major military conflict, systemic financial crisis, or natural disaster passes without some form of international official rescue lending.

In the past two decades, official overseas lending has returned with force, with China joining advanced country governments as an active official lender. The size of the post-2008 crisis international bailout packages of Greece, Iceland, Ireland, and Portugal set records (relative to the recipient’s GDP or IMF quotas). In its early stages still, official lending during the Covid-19 crisis has already skyrocketed both in the form of various emergency facilities at the IMF and World Bank and swap lines from the Federal Reserve, a replay of the global financial crisis of 2008.

A further key insight from our analysis is that official lending increases with the degree of economic integration. Standard gravity models suggest that economies that are closely interlinked, are also more likely to cooperate financially when adversity strikes. At a more general level, the rise in globalization of recent decades occurs alongside a rise in official cross border finance.

While their character may morph over time, we conclude that official capital flows will remain a central element of the international financial system for decades to come. Against this background, more work is needed to analyze the features of official lending around the world, as well as its determinants and consequences. On determinants, our analysis represents a first step to understand why sovereign nations lend to each other. There are many questions more for future research. What are geopolitical drivers of official lending? What is the role of central bank cross-border lending in crisis management and resolution? Should official loans and bailout packages be extended via bilateral, regional or rather multilateral institutions? Also some of the questions addressed in an older literature may warrant revisiting: What are the spillovers between official and private capital flows? What are the effects of policy conditionality that is so often attached to official loans? No doubt the unfolding Covid19 pandemic will raise a whole new set of questions on the design and efficacy of new crisis lending facilities and official debt relief efforts.

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