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Hope Springs Eternal: French Bondholders and the Repudiation of Russian Sovereign Debt

Online ISBN:
9780300220933
Print ISBN:
9780300190915
Publisher:
Yale University Press
Book

Hope Springs Eternal: French Bondholders and the Repudiation of Russian Sovereign Debt

Kim Oosterlinck
Kim Oosterlinck
Solvay Brussels School of Economics and Management, Université Libre de Bruxelles
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Published online:
19 January 2017
Published in print:
24 May 2016
Online ISBN:
9780300220933
Print ISBN:
9780300190915
Publisher:
Yale University Press

Abstract

This is a book about hope and international finance. The repudiation of Russia’s debt by the Bolsheviks in 1918 affected French investors for several generations. The reason for this was the sheer volume of money lent by institutional investors and private citizens alike. This book focuses on the reasons which prompted French investors to hope they would eventually be repaid. In this financial context, hope was reflected in the fluctuations of Russian bond prices. Indeed, in view of the extreme nature of the repudiation, the prices of Russian sovereign debt experienced only a modest decline. As a matter of fact, they actually increased after the repudiation, and their yields were well below those observed nowadays when sovereign debts are repudiated. Far from being a sign of irrational behaviour, this trend can be attributed to expectations that one or more extreme events could occur. Governments have four key incentives to repay their debts: fear of a loss of reputation and consequent exclusion from capital markets; fear of armed intervention; trade sanctions; and seizure of collateral. In the Russian case, investors remained hopeful for the aforementioned reasons but they also hoped that a third-party government would stand in for the Russian government and fulfil its obligations. This book assesses the relative weight of each of these reasons to hope and shows why investors refused to view their repudiated bonds as valueless.

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