Economic fundamentals, market failures and capital exports: Latin America and London’s capital market, 1880-1913

Abstract

This paper analyzes the mechanisms through which the industrial organization of the market for sovereign debt in London affected borrowing costs in the period of 1880-1913. The traditional literature had emphasized the role of the economic fundamentals to explain the evolution of sovereign risk. More recent works, however, have demonstrated that economic fundamentals may be irrelevant under certain conditions, and that their effect on risk premia is dynamic in time. I use the concept of “relationship banking” to describe the relations between financial intermediaries, borrowing governments, and borrowing costs, and provide a new explanation of the Baring crisis of 1890.