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Who’s dumb enough to promote loans to governments?

By ALEX J. POLLOCK [Wall Street Journal] – The German External Loan of 1924 that followed to implement the Dawes Plan was considered by many to be “a brilliant success.” As late as 1930, with 19 years left to maturity, these 7% Dawes loan bonds traded above their face value, at 109. “The Dawes Loan opened the eyes of American investors to the romance of buying foreign securities,” wrote Charles Kindleberger and Robert Aliber in their classic “Manias, Panics and Crashes.” Foreign government bonds became popular in the new financial capital of the world, New York City.

But it was a disappointed romance. In 1934, the German government announced it was no longer paying on Dawes bonds. By 1936, 35% of the sovereign bonds floated in New York in the 1920s were in default—an experience similar to defaults on subprime mortgages in our own time. The vast majority of the sovereign debt that had been created by World War I also defaulted.

In 1933, Winkler predicted that “All will at last be forgotten. New foreign loans will again be offered, and bought as eagerly as ever.” And then: “Investors will once again be found gazing sadly and drearily on foreign promises to pay.” A brilliant forecast.

As European banks and other investors today gaze sadly on government promises to pay, it is essential to ask: Who promotes loans to governments?

The answer is that governments promote loans to governments.

Continued at The Wall Street Journal | More Chronicle & Notices.

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