Default Risk on Two Sides of the Atlantic
This chapter focuses on the evolution of Brazil's credit risk between 1824 and 1889. It determines changes in the government's creditworthiness by reference to the default premium on Brazilian bonds traded in London and Rio de Janeiro. By locating persistent shifts using weekly data on bond yields, the chapter identifies key turning points in the evolution of the Empire's risk premium. It considers and rejects the hypothesis that Brazil's reputation for repayment was the chief determinant of the decline in country risk. In most instances durable changes in the pricing of Brazilian credit risk in the bond markets were related to domestic political events and foreign policy shocks, especially war. These created political and fiscal stresses that altered bondholders' expectations of the government's willingness to pay. Investors faced such episodes with apprehension and viewed their successful resolution with relief, as they repriced sovereign risk accordingly.
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