Hamlet without the Prince of Denmark: Relationship banking and conditionality lending in the London market for government debt

Marc Flandreau and Juan Flores Zendejas

No 7915, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper offers a theory of conditionality lending in 19th-century international capital markets. We argue that ownership of reputation signals by prestigious banks rendered them able and willing to monitor government borrowing. Monitoring was a source of rent, and it led bankers to support countries facing liquidity crises in a manner similar to modern descriptions of ?relationship? lending to corporate clients by ?parent? banks. Prestigious bankers? ability to implement conditionality loans and monitor countries? financial policies also enabled them to deal with solvency. We find that, compared with prestigious bankers, bondholders? committees had neither the tools nor the prestige required for effectively dealing with defaulters. Hence such committees were far less important than previous research has claimed.

Keywords: Bondholder committees; Conditionality; Debt crises; Prestige; Relationship banking (search for similar items in EconPapers)
JEL-codes: F34 N20 (search for similar items in EconPapers)
Date: 2010-07
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Citations: View citations in EconPapers (4)

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