Military conquest and sovereign debt: Chile,Peru and the London bond market, 1876–1890 |
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Authors: | Richard Sicotte Catalina Vizcarra Kirsten Wandschneider |
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Institution: | (1) University of Vermont, Burlington, VT, USA;(2) Occidental College, Los Angeles, CA, USA |
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Abstract: | As a result of the War of the Pacific (1879–1883), Chile conquered Peruvian and Bolivian territories rich in nitrates and
guano. We conduct econometric tests for structural breaks in the time series of the government bonds for Chile and Peru between
1876 and 1890 in order to examine the effects of the changes in resource endowments on the investors’ perceptions of the risk
premia of Chilean and Peruvian securities. Our results reveal that investors were extremely pessimistic about the prospects
of Chilean, and especially Peruvian debt prior to the war. Early Chilean victories that anticipated the transfer of the richly
endowed provinces to Chile caused significant increases in the price of Chilean securities. But such was the low regard with
which investors viewed the Peruvian government that the fall of Lima caused an increase in the price of Peruvian bonds on
the hope that Chile would assume some of the responsibility for them. Endowments, reputations, and the countries’ financial
conditions figure prominently as the driving forces behind the investors’ behavior. |
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