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Crying on Lombard Street: fixing sovereign defaults in the 1890s

The wave of sovereign defaults in the 1890s was one of the worst ever remembered in the history of finance. From Argentina in 1890 to Brazil in 1898, countries in Latin America and Southern Europe defaulted on their external debt, inflicting investors with huge losses. However, this was the last cluster of defaults of the gold standard era. At the beginning of the 20th century and until the outbreak of World War I, defaults were less frequent despite the continuous increase in foreign government borrowing. The literature has provided several explanations on this apparent success all relative to improvements introduced in the market. This paper argues that the fall in the number of defaults is more related to a more favorable world macroeconomic environment and to an increased liquidity available in international financial markets than to an abrupt shift in the manner in which defaults were handled. I show that settlements were more correlated with the relative facility to re-access foreign capital markets than to changes in the financial architecture.