DP17286 The Puzzle of Sovereign Debt Collateral: Big Data and the First Age of Financial Globalization

Author(s): Marc Flandreau, Stefano Pietrosanti, Carlotta E. Schuster
Publication Date: May 2022
Keyword(s): Collateral, financial innovation, Information, Legal Engineering, Property rights, Sovereign debt, state capacity
JEL(s): G24, H63, K12, K33, N20
Programme Areas: Economic History
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17286

During the hypothecation "mania" of 1849-1875, many sovereign borrowers relied on the posting of collateral such as, famously, Peruvian guano. But in fact, such "securities" could not be repossessed. To explain the puzzling phenomenon of sovereign hypothecation, which has a long history before and after the episode we consider, we emphasise an informational channel: Posting collateral produced information on opaque borrowers by displaying borrowers' resources and behaviour. Drawing on a novel dataset and a careful exploration of the universe of individual hypothecations in London contracts, as well as of their context and of the institutional framework they created, we establish the pledges' role in documenting sovereigns' wealth, commitment to repay and management of revenue streams. Encasing disclosure in contracts written by lawyers while incentivising the truthfulness of data process through penalties explains investors' readiness to pay a premium, an early case of "Big Data" supported lending.