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The Puzzle of Sovereign Debt Collateral: Big Data and the First Age of Financial Globalization

Author

Listed:
  • Flandreau, Marc
  • Pietrosanti, Stefano
  • Schuster, Carlotta E.

Abstract

During the hypothecation “mania†of 1849-1875, many sovereign borrowers relied on the posting of collateral such as, famously, Peruvian guano. But in fact, such “securities†could not be repossessed. To explain the puzzling phenomenon of sovereign hypothecation, which has a long history before and after the episode we consider, we emphasise an informational channel: Posting collateral produced information on opaque borrowers by displaying borrowers’ resources and behaviour. Drawing on a novel dataset and a careful exploration of the universe of individual hypothecations in London contracts, as well as of their context and of the institutional framework they created, we establish the pledges’ role in documenting sovereigns’ wealth, commitment to repay and management of revenue streams. Encasing disclosure in contracts written by lawyers while incentivising the truthfulness of data process through penalties explains investors’ readiness to pay a premium, an early case of “Big Data†supported lending.

Suggested Citation

  • Flandreau, Marc & Pietrosanti, Stefano & Schuster, Carlotta E., 2022. "The Puzzle of Sovereign Debt Collateral: Big Data and the First Age of Financial Globalization," CEPR Discussion Papers 17286, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17286
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    More about this item

    Keywords

    Collateral; Information; Sovereign debt; Property rights; Financial innovation; Legal engineering; State capacity;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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