August 1, 2005. Hope springs eternal… French bondholders and the Soviet Repudiation (1915-1919) Kim Oosterlinck1 Université Libre de Bruxelles, Solvay Business School,
[email protected] John Landon-Lane Department of Economics, Rutgers University
[email protected] ABSTRACT By their extreme nature, repudiations rarely occur. History is therefore crucial to analyze their impact on bond prices. This paper provides an empirical study based on an original database: prices of a Tsarist bond traded in Paris before and after its repudiation by the Soviets. A structural vector autoregression is used to identify shocks to this bond that are orthogonal to shocks hitting a proxy for the Paris bond market, the French 3% rente. French market shocks are thus disentangled from repudiation specific shocks hitting the Russian bond. Consistent with expectations no major Russian shocks appears before the 1917 revolution. For 1918, shocks are mainly related with bailouts or hopes of partial bailouts. In 1919, however, the nature of shocks changes as they can be explained either by the negotiations with the Soviets or by the fate of the White Armies. In view of these elements, we argue that the bonds’ value were subject to a “Peso problem”. Their prices essentially reflected expected extreme events that never took place. Keywords: repudiation, sovereign debt, secession, Russia, Soviet, war, country break-up. JEL Classification: F34, G1, N24. 1 Corresponding author. 1 1. Introduction On February 8, 1918, a rumor feared by many investors became reality: an official Soviet decree repudiated all bonds issued by the Tsarist government. The day following the repudiation, a representative Russian bond, floated on the Paris2 stock exchange in 1906, was still traded at 55% of its par value and the following week, the bond lost a mere 2.73%.