## _wp03107

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---

### I. INTRODUCTION
- Objective: Examine the Corporation of Foreign Bondholders (CFB), a London‑based association set up in 1868 to help private investors coordinate in cases of international default.
- Rationale:
  - The CFB was active and influential between the late 1860s and the early 1950s, operating during the first era of bond finance for emerging markets (1870–1913).
  - Modern relevance: potential lessons for improving creditor coordination today amid bond‑dominated flows and dispersed, anonymous bondholders.
- Key questions:
  - Could a revamped creditor association provide a private‑sector alternative or complement to reforms such as collective action clauses or a sovereign debt restructuring mechanism?
  - In what respects was the CFB successful, and which present‑day problems would an association of this type be able to resolve?

### II. THE NEED FOR CREDITOR COORDINATION: 1870–1913 VERSUS TODAY
- Similarities across eras:
  - Large scale international capital flows; active primary and secondary bond markets in London.
  - Defaults and renegotiations were common and messy in both eras.
  - Absence of a formal sovereign debt restructuring mechanism was an issue in 1873, as it remains a focal point of modern reform debates.
- Differences affecting incentives to cooperate:
  - Extent of sovereign immunity:
    - Pre‑WWI: doctrine made it almost impossible for individual creditors to sue sovereign debtors; English Court of Appeal treated “so‑called bonds” as engagements of honour.
    - Post‑1950s erosion: U.S. restricted foreign immunity policy (formalized in the Foreign Sovereign Immunities Act of 1976) and Britain’s State Immunity Act of 1978; modern lawsuits (e.g., Elliott Associates vs. Peru) increased scope for individual creditor legal action.
    - Implication: sovereign immunity in the past likely made creditor coordination easier than today.
  - Collateral, takeovers, and (rare) use of force:
    - Bonds often secured by specific assets (railways) or tax revenues in 1870–1913; creditors sometimes took over assets or tax receipts; gunboat diplomacy used rarely.
    - Railway bonds were a large share of British overseas investments: “some 40 percent”.
    - Implication: richer remedies historically increased demand for creditor coordination.
  - Number of financial centers:
    - Historical: multiple centers (St. Petersburg, London, Paris, Amsterdam, Hamburg, Berlin, Warsaw); simultaneous multi‑center, multi‑currency issues (example: 1913 China bond with coupons payable in sterling, roubles, marks, francs, or yen).
    - Modern legal jurisdictions for emerging market bonds (out of 2452 bonds): 41 percent English law, 35 percent New York law, 10 percent Japanese law, 7 percent German law, remainder various.
    - Implication: number of potential issuance centers not substantially different; legal fragmentation remains relevant.
  - Number and variety of bond issues:
    - Historical: fewer distinct bonds per country (example: Russia had 23 bonds in 1883).
    - Modern: Argentina estimated to have 152 different bonds outstanding.
    - Implication: today’s heterogeneity across bonds increases thorniness of relative treatment issues.
  - Diffusion of bondholders:
    - Historical: ultimate individual holders likely in the hundreds per country; coordination problems manageable in person.
    - Modern: tens of thousands of individual investors, though many hold via mutual funds (mitigating factor).
  - Role of international financial institutions:
    - Today: IMF and others engage in ongoing surveillance and programs; new loans and conditionality can speed resolution.
    - Portes (2000) argues that to reduce large IMF bailouts, institutions including revamped creditors’ associations would be needed.

### III. EFFECTIVENESS: SUCCESSES AND FAILURES
- Aggregate outcomes:
  - The CFB reached agreements in renegotiations with large borrowers: Turkey, Spain, Greece, Portugal, Mexico, Argentina, Brazil.
  - CFB self‑assessment (early 1900s): managed “enlightened countries,” none of which were in default any longer (1905–1906 Report, pp. 1–2).
  - Defaults and amounts in default declined dramatically between the 1870s and the early 20th century (see Figure 1: Loans in Default, 1877–1913, in millions of pounds sterling).
- Persistent problems and limits:
  - Small countries and U.S. states often remained in long defaults (examples: Honduras, Costa Rica, Guatemala; Southern U.S. states such as Alabama and Virginia).
  - Political dynamics and creditor nationalities mattered: American bondholders (without a permanent association) sometimes succeeded where the CFB failed.
  - Debt burden per se did not always predict defaults; willingness to pay (political factors) often decisive (CFB 1908 Report examples: Ecuador vs. Guatemala).
- Comparative empirical metrics:
  - Average duration of defaults: about six years in 1871–1925, versus 14 years in 1821–1870 and over 10 years in 1925–1976.
  - Ex‑post returns: British bondholders realized higher ex‑post rates of return on foreign bonds than American bondholders.
- Overall assessment:
  - The CFB had a “fairly impressive record overall,” but could not secure successful settlements for defaulters unwilling to regain access to London/European capital markets.
  - The historical CFB likely represents an upper bound on what a modern bondholders’ association could achieve; incentives to defect are probably higher today.

### IV. THE CORPORATION OF FOREIGN BONDHOLDERS: MODE OF OPERATION
- Primary objectives and information assets:
  - Protect holders of foreign Government, State, or Municipal securities by providing information and fostering creditor coordination.
  - Information holdings included eighteen volumes of Brazilian newspaper clips (1870–1913) and over 500 volumes of country information and correspondence; agents abroad provided “valuable and often confidential information” (1873 Report).
- Institutional history and governance:
  - Founded 1868; incorporated under License from the Board of Trade in 1873.
  - Reconstituted in 1898 by Special Act of Parliament in 1897 to reduce underwriter influence.
  - Post‑1898 Council composition: 21 members—six appointed by the British Bankers Association, six by the London Chamber of Commerce, nine co‑opted by the Council.
- Funding and remuneration:
  - Non‑profit; officers virtually unpaid: yearly stipends of 1,000 pounds for the president, 500 pounds for the vice president, and 100 pounds for other Council members.
  - Activities funded by interest on an initial fund of 115,000 pounds raised from members.
  - Committee members sometimes received a “small fee” for settlements; fees kept deliberately small.
- Country‑specific committees and processes:
  - Ad hoc committees formed when a “sufficient number” of interested bondholders requested action.
  - 1903 snapshot: 20 Bondholders’ Committees affiliated with the CFB, consisting of 215 members; only 32 (exclusive of president and vice‑president) were also Council members.
  - Typical default process:
    - Committee members traveled to the defaulting country; met senior officials.
    - Negotiated locally; returned to London; consulted the Council; presented proposed restructuring to all bondholders in a general meeting.
  - Committee autonomy: committees could act independently without Council interference.
- Coordination mechanisms among British creditors:
  - Registration attempts of holders to facilitate coordination.
  - General meetings and voting: all proposed deals brought to a vote in public meetings of bondholders; circular votes used where appropriate; accepted deals required bondholders to “lodge their securities for stamping in formal assent.”
  - Typical participation: meetings often involved hundreds of bondholders for significant issues; small‑issue meetings ranged from 20–80 attendees.
  - Share of bonds represented by CFB varied by case:
    - Argentina 1889 dollar‑denominated debt: about one sixth of holders represented by the British CFB.
    - Cedula Bonds (Province of Buenos Aires, 1903): CFB voters held about a quarter of all bonds.
    - Pisco to Ica Railway (Peru): holders registered with CFB represented 180 million pounds out of original 290 million pounds (260 million unredeemed) as of 1881.
    - Ecuador (1907): bondholders present represented about 4 million pounds, “a third of the total debt.”
    - Nicaragua (1912): holders of 1 million pounds out of total 1.2 million attended a meeting described as a “low turnout.”
- Internal consensus and dispute resolution:
  - Emphasis on unanimity and equal treatment across classes of bondholders; 1877 decision forbade arrangements giving preferential terms to any group.
  - Arbitration and mediation used in complex cases (example: Chile; Turkish bonds arbitration in 1902).
  - Conflicts often arose when same collateral backed multiple bonds or when holders had differential access to collateral (example: Turkish bonds secured by Egyptian “tribute”).
- Forceful coordination and litigation among creditors:
  - Lawsuits by dissenting bondholders were rare but occurred; example: expensive litigation in Peru between committees culminating in agreement confirmed by the High Court of Justice.

### Dealing with defectors and majority action clauses
- CFB tactics:
  - Wright (2000) argues the CFB occasionally sought to shame creditors who extended credit to countries in default to CFB members; CFB reports do not document such shaming consistently.
  - No mention was found of majority action clauses in the CFB records.
  - Historical context: majority action clauses introduced in corporate bonds in Britain in 1879 and are common in sovereign bonds under United Kingdom law today; timing of their prominence in sovereign markets is unclear.

### Coordination with bondholders in other countries
- International cooperation:
  - CFB sought “unanimity of action among bondholders, and particularly with our influential allies in Holland.”
  - Continuous relations with Bourses of Amsterdam and Rotterdam; cooperated with Frankfurt, Berlin, Hamburg; corresponded with Paris and to some extent New York.
- Examples of cross‑border coordination:
  - 1875–1876: English committee’s negotiations with Spanish representatives communicated “step by step to committees of Bondholders in Paris, Brussels, Amsterdam and Frankfurt...”
  - 1874 coordination with Frankfurt on overdue Alabama bonds; 1897 Buenos Aires bonds.
  - 1877: separate committees in London, Paris, Amsterdam for Peruvian debt coordinated.
  - 1876: British creditors and French Société Générale coordinated sales of Peruvian guano and division of proceeds.
- Blocking market access as a central tool:
  - Blocking access to international capital markets was central; e.g., 1874 action against Mexico led to settlement.
- Coordination frictions and exceptions:
  - Amsterdam bondholders accepted conversion of New Grenada to Colombian debt only with cash payments, not land exchange.
  - 1901 disagreements between British, French, German committees over Portugal resolved eventually.
  - Relations with American bondholders often conflictual; US creditors sometimes settled unilaterally and obtained precedence (examples: Honduras Syndicate, Santo Domingo).

### Relationship with the British Government
- Interaction with authorities:
  - CFB maintained close contact with H.M.’s Treasury and the Foreign Office and occasionally solicited diplomatic support; it sought to request Foreign Office assistance “as seldom as possible.”
  - British government usually reluctant to intervene on behalf of investors who sought higher returns abroad; defaults often seen as imprudent investment.
- Instances of government involvement:
  - Diplomatic pressure applied on Salvador (1875).
  - Honduras issues brought to Parliament in 1875.
  - 1903: CFB asked British authorities not to recognize Panama unless it assumed a fair share of Colombian external debt.
  - Guatemala: diplomatic pressure led to renegotiated agreement in 1913 after approximately 14 years of default.
- British diplomats sometimes acted as agents and supervised collection of securities on behalf of the CFB.
- Council social composition (1938 Report): of 107 members, 13 had Lord as main title, 12 Honourables or Right Honourables, 19 Sirs, 9 high‑ranking military officers or judges, 6 Earls or Viscounts; of remaining Esquires, 3 had the title of Member of Parliament.

### When negotiations failed: arbitration, market blocking, force, and lawsuits
- Arbitration and mediation:
  - Arbitration used in some cases (e.g., Ecuador‑Quito Railroad 1897; Santo Domingo); CFB sought but sometimes failed to obtain arbitration (Guatemala, Honduras).
  - Venezuela claims: total bondholder claims ~10 million pounds; arbitrators awarded 1.84 million.
- Market blocking:
  - Main punishment: refusal of the London Stock Exchange to quote new bonds for governments in default (practice adopted in 1827); the Exchange relied on the CFB for information.
  - Effectiveness documented: withholding money “exercises its own effective influence...Greece, Ecuador, the Southern States of the Union and other defaulting states... find that it is not possible to find an open market when one has been closed.”
  - Exceptions existed: Ecuador obtained funds from French and later U.S. creditors despite blacklisting; Guatemala secured German and American loans despite defaulting on British debt.
- Use of force and diplomatic pressure:
  - Rare but consequential: Egypt culminated in British intervention in 1882; blockade of Venezuela in 1902 by Britain, Germany, Italy resulted in Venezuela completing payments to the blockading Powers by end of 1906.
  - Hague Peace Conference 1906 accepted legitimacy of force in debt disputes only when defaulters refused arbitration or failed to comply.
- Lawsuits:
  - Legal action against foreign governments viewed as largely ineffective in recovering payments.

### Nature of settlements: instruments, revenue control, and conditionality
- Settlement principles:
  - Mutually agreed changes preferred over unilateral alterations; CFB protested unilateral actions (example: Argentina’s 1889 unilateral redemption attempt).
  - Debt forgiveness generally avoided but occasionally considered; CFB opposed writing down principal or interest arrears but showed occasional flexibility.
- Common instruments and remedies:
  - Debt/equity swaps and asset takeovers:
    - 1874: bondholders took over land in Colombia instead of unpaid bonds.
    - 1876: Alabama Railroad sale forced by CFB; bondholder purchased railroad in exchange for a fraction of debt and bonds converted to shares; CFB‑appointed trustees took possession in February 1876.
    - Peru offered guano, control over state railways, customs, steamer lines, and plots of government land.
    - Paraguay: CFB took over collateralized assets; arable land sold to repay debt.
  - Taking over customs and tax revenues:
    - Turkey: foreign bondholders took control after 1870s defaults; half of board members controlling Ottoman revenues were from the CFB; revenues from tobacco, stamps, spirits, silk directed to a sinking fund.
    - Uruguay: creditors took over customs revenues in 1903; by 1906 Uruguay had pledged 75 percent of its customs revenues to pay external debts; English bondholders’ representative collected receipts daily.
    - Management and distribution of proceeds among claim holders posed persistent problems.
  - Conditionality:
    - CFB offered economic policy advice and sought to impose conditions aimed at fiscal sustainability and creditor monitoring when it had bargaining leverage.
    - Examples: Paraguay encouraged to form a central bank in 1876; Turkey obtained new loans only after allowing creditors to manage customs revenues.
    - Generally limited success except where extreme measures (control over customs/tax administration) were imposed.

### Assessment, implications, and open questions
- Historical assessment:
  - CFB emerged in response to a 19th‑century default wave; rationale declined with demise of international bond market and reduced importance of British investors.
  - The CFB facilitated creditor coordination historically but had an imperfect track record and often faced difficulties reaching consensus.
- Lessons and open research questions:
  - Role of official intervention: Portes (2000) argues advanced‑country authorities and international institutions should encourage creation of creditor associations through moral suasion; U.S. Foreign Bondholders Protective Council was set up with State Department encouragement.
  - Membership composition: who would natural members be today — nationality, investor size, exchange location, or bond type? MacMillan (1997) suggested separate revived bodies for New York‑law and London‑law bondholders.
  - Preventing defection by “vulture funds” today versus historical role of CFB in protecting small bondholders from large bondholders arranging separate deals.
- Main conclusion:
  - The CFB provides an “upper bound” on what a revamped creditor association might achieve today.
  - Replicating key CFB strengths faces several obstacles: fewer tangible collateral assets in modern sovereign bonds, political infeasibility of foreign takeover of tax administration, and difficulty recreating the CFB’s market‑blocking power in today’s international financial environment.
  - An association would likely be helpful but face greater coordination challenges, including preventing lawsuits from dissenting creditors.

*Source: _wp03107 - References.*

### References..............................................................................................................

### _wp03107 - References..............................................................................................................................27

### I. INTRODUCTION
- Objective: Examine the Corporation of Foreign Bondholders (CFB), a London‑based association set up in 1868 to help private investors coordinate in cases of international default.
- Rationale:
  - The CFB was active and influential between the late 1860s and the early 1950s, operating during the first era of bond finance for emerging markets (1870–1913).
  - Modern relevance: potential lessons for improving creditor coordination today amid bond‑dominated flows and dispersed, anonymous bondholders.
- Key questions addressed:
  - Could a revamped creditor association provide a private‑sector alternative or complement to reforms such as collective action clauses or a sovereign debt restructuring mechanism?
  - In what respects was the CFB successful, and which present‑day problems would an association of this type be able to resolve?

### II. THE NEED FOR CREDITOR COORDINATION: 1870–1913 VERSUS TODAY
- Similarities between eras:
  - Large scale international capital flows; active primary and secondary bond markets in London.
  - Defaults and renegotiations were common and messy in both eras.
  - Absence of a formal sovereign debt restructuring mechanism was an issue in 1873, as it remains a focal point of modern reform debates.
- Differences reducing or increasing incentives for creditor cooperation:
  - Extent of sovereign immunity:
    - Pre‑WWI: doctrine made it almost impossible for individual creditors to sue sovereign debtors; English Court of Appeal decisions treated “so‑called bonds” as engagements of honour (cited in MacMillan 1995a, p. 336).
    - Post‑1950s erosion: U.S. restricted foreign immunity policy (formalized in the Foreign Sovereign Immunities Act of 1976) and Britain’s State Immunity Act of 1978; modern lawsuits (e.g., Elliott Associates vs. Peru) increased scope for individual creditor legal action.
    - Implication: sovereign immunity in the past likely made creditor coordination easier than today.
  - Collateral, takeovers, and (rare) use of force:
    - 1870–1913: bonds often secured by specific assets (railways) or tax revenues; creditors sometimes took over assets or tax receipts; gunboat diplomacy used rarely.
    - Railway bonds were a large share of British overseas investments: “some 40 percent” (Feis, 1965, p. 27; Fishlow, 1985, p. 392; Bordo, Eichengreen, and Kim, 1998, pp. 16–17).
    - Implication: richer remedies available historically increased the demand for creditor coordination.
  - Number of financial centers:
    - Historical: multiple centers (St. Petersburg, London, Paris, Amsterdam, Hamburg, Berlin, Warsaw); simultaneous multi‑center, multi‑currency issues (example: 1913 China bond with coupons payable in sterling, roubles, marks, francs, or yen).
    - Modern legal jurisdictions for emerging market bonds (out of 2452 bonds): 41 percent English law, 35 percent New York law, 10 percent Japanese law, 7 percent German law, remainder various.
    - Implication: number of potential issuance centers not substantially different; legal fragmentation remains relevant.
  - Number and variety of bond issues:
    - Historical: fewer distinct bonds per country (example: Russia had 23 bonds in 1883).
    - Modern: Argentina estimated to have 152 different bonds outstanding (Marx, 2003, p.7).
    - Implication: today’s heterogeneity across bonds increases thorniness of relative treatment issues.
  - Diffusion of bondholders:
    - Historical: ultimate individual holders likely in the hundreds per country; coordination problems manageable in person.
    - Modern: tens of thousands of individual investors, though many hold via mutual funds (mitigating factor).
  - Role of international financial institutions:
    - Today: IMF and others engage in ongoing surveillance and programs; new loans and conditionality can speed resolution.
    - Portes (2000) argues that to reduce large IMF bailouts, institutions including revamped creditors’ associations would be needed.

### III. EFFECTIVENESS: SUCCESSES AND FAILURES
- Aggregate outcomes:
  - The CFB reached agreements in renegotiations with large borrowers: Turkey, Spain, Greece, Portugal, Mexico, Argentina, Brazil.
  - CFB self‑assessment (early 1900s): managed “enlightened countries,” none of which were in default any longer (1905–1906 Report, pp. 1–2).
  - Defaults and amounts in default declined dramatically between the 1870s and the early 20th century (see Figure 1: Loans in Default, 1877–1913, in millions of pounds sterling).
- Persistent problems and limits:
  - Small countries and U.S. states often remained in long defaults (examples: Honduras, Costa Rica, Guatemala; Southern U.S. states such as Alabama and Virginia).
  - Political dynamics and creditor nationalities mattered: American bondholders (without a permanent association) sometimes succeeded where the CFB failed, notably with small Latin American countries and Southern U.S. states—reflecting trade links, international politics, and access to U.S. markets.
  - Debt burden per se did not always predict defaults; willingness to pay (political factors) often decisive (CFB 1908 Report examples: Ecuador vs. Guatemala).
- Comparative metrics cited in literature:
  - Average duration of defaults: about six years in 1871–1925, versus 14 years in 1821–1870 and over 10 years in 1925–1976 (Eichengreen and Portes, relying on Suter, 1992).
  - Ex‑post returns: British bondholders realized higher ex‑post rates of return on foreign bonds than American bondholders (Eichengreen and Portes, 1989a)—potentially due in part to the CFB.
- Overall assessment:
  - The CFB had a “fairly impressive record overall,” but could not secure successful settlements for defaulters unwilling to regain access to London/European capital markets.
  - The historical CFB likely represents an upper bound on what a modern bondholders’ association could achieve; incentives to defect are probably higher today.

### IV. THE CORPORATION OF FOREIGN BONDHOLDERS: MODE OF OPERATION
- Primary objectives:
  - Protect holders of foreign Government, State, or Municipal securities by:
    - Providing extensive information on borrowing countries (economic commentary, statistics, political analysis).
    - Fostering creditor coordination, especially in default situations.
  - Information assets: eighteen volumes of Brazilian newspaper clips (1870–1913); over 500 volumes of country information and correspondence; agents abroad providing “valuable and often confidential information” (1873 Report).
- Institutional history and governance:
  - Founded 1868; incorporated under License from the Board of Trade in 1873.
  - Criticized early on for bank influence; reconstituted in 1898 by Special Act of Parliament in 1897 to reduce underwriter influence.
  - Post‑1898 Council composition: 21 members—six appointed by the British Bankers Association, six by the London Chamber of Commerce, nine co‑opted by the Council (from eligible “certificate holders”).
  - Funding and remuneration:
    - Non‑profit; officers virtually unpaid: yearly stipends of 1,000 pounds for the president, 500 pounds for the vice president, and 100 pounds for other Council members.
    - Activities funded by interest on an initial fund of 115,000 pounds raised from members.
    - Committee members sometimes received a “small fee” for settlements; fees kept deliberately small.
- Country‑specific committees and operations:
  - Ad hoc committees formed when a “sufficient number” of interested bondholders requested action.
  - Committee membership typically voluntary; President and Vice‑President ex‑officio; most committee members not Council members.
  - 1903 snapshot: 20 Bondholders’ Committees affiliated with the CFB, consisting of 215 members; only 32 (exclusive of president and vice‑president) were also Council members.
  - Typical process after default:
    - Committee members traveled to the defaulting country; met senior officials (chief executive, key ministers).
    - Negotiated locally; returned to London; consulted the Council; presented proposed restructuring to all bondholders in a general meeting.
  - Committee autonomy: committees could act independently without Council interference; Council occasionally acted on its own initiative (e.g., British representative on Ottoman Public Debt Council).
- Coordination mechanisms among British creditors:
  - Registration attempts of holders (even when securities deposited in banks) to facilitate coordination.
  - General meetings and voting:
    - All proposed deals brought to a vote in public meetings of bondholders.
    - Circular votes used where appropriate.
    - Once accepted, bondholders “lodge their securities for stamping in formal assent” (1903 Report, p. 13).
    - Drawing procedures at meetings for conversion/redemption allocations.
  - Typical participation:
    - Meetings often involved hundreds of bondholders for significant issues; small‑issue meetings ranged from 20–80 attendees.
    - Examples: ~200 bondholders at Costa Rica meeting (1874); 70 then about 150 at New Granada meetings (1872–1873).
  - Share of bonds represented by CFB varied widely across cases:
    - Argentina 1889 dollar‑denominated debt: about one sixth of holders represented by the British CFB.
    - Cedula Bonds (Province of Buenos Aires, 1903): CFB voters held about a quarter of all bonds.
    - Pisco to Ica Railway (Peru): holders registered with CFB represented 180 million pounds out of original 290 million pounds (260 million unredeemed) as of 1881.
    - Ecuador (1907): bondholders present represented about 4 million pounds, “a third of the total debt.”
    - Nicaragua (1912): holders of 1 million pounds out of total 1.2 million attended a meeting described as a “low turnout.”
- Mechanisms for internal consensus and dispute resolution:
  - Emphasis on unanimity and equal treatment across classes of bondholders: 1877 decision forbade arrangements giving preferential terms to any group.
  - General meeting voting served as the primary mechanism for resolving internal disagreements.
  - Arbitration and mediation used in complex cases involving multiple bond classes (example: Chile; Turkish bonds arbitration in 1902).
  - Conflicts often arose when same collateral backed multiple bonds, or when holders had differential access to collateral (example: Turkish bonds secured by Egyptian “tribute”).
- Forceful coordination and litigation among creditors:
  - Lawsuits by dissenting bondholders were rare but occurred, often over unequal treatment of different bonds.
  - Example: expensive litigation in Peru between the Peruvian Bondholders’ Committee and holders represented by the CFB (National Pisco to Ica Railway committee), culminating in agreement confirmed by the High Court of Justice.

*Source: Annual Reports of the Corporation of Foreign Bondholders and excerpted IMF working paper content in _wp03107 - References.*

### 1885. One prominent bondholder, Mr. Proctor, appealed this agreement but lost the subsequent

### _wp03107 - 1885. One prominent bondholder, Mr. Proctor, appealed this agreement but lost the subsequent

### Dealing with defectors and majority action clauses
- Wright (2000) argues the CFB occasionally sought to shame creditors who extended credit to countries in default to CFB members; the CFB’s main function may have been to harm the reputation of defecting creditors.
- The authors did not find mention of such shaming activity in the CFB reports, concluding it was at best one of several coordination tools.
- No mention was found of majority action clauses (collective action clauses) in the CFB records.
- Historical context: majority action clauses were introduced in corporate bonds in Britain by Francis Beaufort Palmer in 1879 and rapidly gained popularity in corporate issues; similar clauses are common in sovereign bonds under United Kingdom law today, but the timing of their prominence in sovereign markets is unclear.

### Coordination with bondholders in other countries
- CFB objectives included “obtain unanimity of action among bondholders, and particularly with our influential allies in Holland” (1873 Report, p. 39).
- Continuous relations and cooperation with Bourses of Amsterdam and Rotterdam; also cooperated with Frankfurt, Berlin, Hamburg, corresponded with Paris and to some extent New York (1873 Report, pp. 51–52).
- Examples of international coordination during renegotiations:
  - 1875–1876: English committee’s negotiations with Spanish representatives were communicated “step by step to committees of Bondholders in Paris, Brussels, Amsterdam and Frankfurt...” (1876 Report, pp. 5–11).
  - 1874: coordination with Frankfurt on overdue Alabama bonds; 1897: Buenos Aires bonds.
  - 1877: separate committees in London, Paris, Amsterdam for Peruvian debt coordinated (1877 Report, p. 31).
  - 1876: British creditors and French Société Générale coordinated sales of Peruvian guano and division of proceeds (1876 Report, pp. 34–40).
- Blocking access to international capital markets was a central coordination tool; e.g., 1874 action against Mexico led the Mexican President to seek settlement (1874 report, p. 44).
- Coordination frictions and exceptions:
  - Amsterdam bondholders accepted conversion of New Grenada to Colombian debt only with cash payments, not land exchange (1873 Report, pp. 38–39).
  - 1901: disagreements between British, French, German committees over Portugal resolved eventually (1901 Report, pp. 1–3).
  - Relations with American bondholders were often conflictual over payment precedence; US creditors sometimes settled unilaterally. Example: Honduras Syndicate obstructed a settlement and demanded priority (1903 Report, p. 233); Santo Domingo dispute (1904 Report, pp. 21–22); British creditors received substantially less than US creditors in one case, prompting CFB appeal to US government (1908 Report, p. 15).

### Relationship with the British Government
- CFB maintained close contact with H.M.’s Treasury and the Foreign Office and occasionally solicited diplomatic support; the CFB sought to request Foreign Office assistance “as seldom as possible.”
- British government usually reluctant to intervene on behalf of investors who sought higher returns abroad; defaults often seen as imprudent investment (Lipson, p. 187).
- Instances of government involvement:
  - Diplomatic pressure applied on Salvador (1875 Report, p. 28).
  - Honduras issues brought to Parliament in 1875.
  - 1903: CFB asked British authorities not to recognize the new republic of Panama unless it assumed a fair share of Colombian external debt.
  - Guatemala: diplomatic pressure led to renegotiated agreement in 1913 after approximately 14 years of default (1913 Report, pp. 12–13).
- British diplomats sometimes acted as agents, received payments, or supervised collection of securities on behalf of the CFB (1873 Report, p. 49).
- Council membership social composition (1938 Report): of 107 members, 13 had Lord as main title, 12 Honourables or Right Honourables, 19 Sirs, 9 high-ranking military officers or judges, 6 Earls or Viscounts; of remaining Esquires, 3 had the title of Member of Parliament and many were former diplomats.
- Comparative note: Continental bondholder associations in Germany and France sometimes used by governments as foreign policy tools; CFB generally more conciliatory to avoid infringing sovereignty.

### When negotiations failed: arbitration, market blocking, force, and lawsuits
- Arbitration and mediation:
  - Arbitration in England between creditors and Ecuador-Quito Railroad in 1897 described in 22 pages of the 1897 Report.
  - International arbitration used in some cases, e.g., Santo Domingo; CFB sought (unsuccessfully) arbitration in Guatemala and Honduras.
  - Arbitration outcomes not always favorable: Venezuela total bondholder claims ~10 million pounds, arbitrators awarded only 1.84 million (1907 Report, p. 22).
  - Mediation examples: Lord Rothschild with Brazilian Ituana Railway; Banque de Paris et des Pays-Bas discussed “unification scheme” for Venezuelan bonds (1903 Report, pp. 10, 14).
- Main punishment mechanism: attempt to block defaulting countries from obtaining new credit via the London Stock Exchange’s refusal to quote new bonds for governments in default (practice adopted in 1827). The Exchange relied on the CFB for information on loan status and renegotiations.
- Effectiveness of market-blocking:
  - 1873 Report: withholding money “exercises its own effective influence...Greece, Ecuador, the Southern States of the Union and other defaulting states... find that it is not possible to find an open market when one has been closed.”
  - 1873: new Guatemalan bond issue prevented with Amsterdam cooperation.
  - 1875: Colombia unable to “appeal for foreign capital” until settlement (1875 Report, p. 32).
  - Exceptions: Ecuador obtained funds from French and later U.S. creditors despite blacklisting; Guatemala secured German and American loans despite defaulting on British debt (1911 Report cited in Kelly, 1998, p. 42; 1895 and 1908 Reports cited in Kelly, 1998, p. 34).
- Harsher measures:
  - Diplomatic or military action used rarely but sometimes successfully: Egypt (culminating in British intervention in 1882); blockade of Venezuela in 1902 by Britain, Germany, Italy resulted in Venezuela completing payments to the blockading Powers by end of 1906 (1907 Report, p. 22).
  - Hague Peace Conference 1906 accepted legitimacy of use of force in debt disputes only when defaulters refused arbitration or failed to comply with arbitration terms (1907 Report, cited in Kelly, p. 43).
- Lawsuits:
  - Legal action against foreign governments viewed as largely ineffective (examples: Costa Rica 1874, Brazil 1897, New Zealand Midland Railway 1901).
  - US court actions against Southern states were costly, protracted, and sometimes vicious; occasional victories in the US Supreme Court but generally failed to obtain significant payments.

### Nature of settlements: instruments, revenue control, and conditionality
- General principle: mutually agreed changes preferred over unilateral alterations (e.g., Argentina’s unilateral redemption attempt in 1889 prompted CFB protest).
- Debt forgiveness generally avoided in principle but sometimes considered; CFB opposed writing down principal or interest arrears but showed occasional flexibility.
- Common settlement forms:
  - Debt/equity swaps and asset takeovers:
    - 1874: bondholders took over land in Colombia instead of unpaid bonds.
    - 1876: Alabama Railroad sale forced by CFB; bondholder purchased railroad in exchange for a fraction of debt and bonds converted to shares; CFB-appointed trustees took possession in February 1876 (1876 Report, pp. 13–17).
    - Peru offered guano, control over state railways, customs, steamer lines, and plots of government land (Wynne, 1951, p. 171).
    - Paraguay: CFB took over collateralized assets, railroads, arable land sold to repay debt (1877 Report, pp. 29–31).
  - Taking over customs and tax revenues:
    - Turkey: foreign bondholders took control after 1870s defaults; half of board members controlling Ottoman revenues were from the CFB; revenues from tobacco, stamps, spirits, silk directed to a sinking fund; CFB reports provided detailed budget analysis (e.g., 1886 Report).
    - Uruguay: creditors took over customs revenues in 1903; by 1906 Uruguay had pledged 75 percent of its customs revenues to pay external debts; English bondholders’ representative collected receipts daily (1906 and 1907 Annual reports, cited by Kelly, p. 42).
    - Management issues: distribution of proceeds among various claim holders posed persistent problems (Turkey, 1902 Report, pp. 15–18); difficulties in taking over pledged assets when local or third-party interests intervened (Honduras railway 1901; Liberia preferred American-appointed Receiver General when surrendering state revenues, 1911 Report, p. 37).
  - Conditionality:
    - CFB offered economic policy advice and sought to impose conditions aimed at fiscal sustainability and creditor monitoring when it had bargaining leverage.
    - Examples: Paraguay encouraged to form a central bank in 1876 (1876 Report, pp. 33–34); Turkey obtained new loans only after allowing creditors to manage customs revenues (1904 Report, p. 26).
    - Generally limited success except where extreme measures (control over customs/tax administration) were imposed.

### Assessment, implications, and open questions
- Historical assessment:
  - CFB emerged in response to 19th-century default wave; rationale declined with demise of international bond market and reduced importance of British investors; CFB was formally wound up more than a decade ago.
  - The CFB facilitated creditor coordination historically but had an imperfect track record and often faced difficulties reaching consensus, especially among holders of different asset types.
- Lessons and open research questions:
  - Should official intervention foster a revamped creditors’ association? Portes (2000) argues for advanced-country authorities and international institutions to encourage such creation through moral suasion; the United States’ Foreign Bondholders Protective Council was set up with State Department encouragement.
  - Who would natural members be today — defined by nationality, investor size, exchange location, or bond type? MacMillan (1997) suggested separate revived bodies for New York-law and London-law bondholders, but modern issuance often spans both.
  - How to prevent defection by “vulture funds” today versus historical role of CFB in protecting small bondholders from large bondholders arranging separate deals.
- Main conclusion:
  - The CFB provides an “upper bound” on what a revamped creditor association might achieve today.
  - Replicating key CFB strengths faces several obstacles: fewer tangible collateral assets in modern sovereign bonds, political infeasibility of foreign takeover of tax administration, and difficulty recreating the CFB’s market-blocking power in today’s international financial environment.
  - An association would likely be helpful but face greater coordination challenges, including preventing lawsuits from dissenting creditors.

*Source: _wp03107 - 1885. One prominent bondholder, Mr. Proctor, appealed this agreement but lost the subsequent*

### REFERENCES

### _wp03107 - REFERENCES

### Historical studies and case histories
- Feis, Herbert, 1930, Europe, The World’s Banker, 1870–1913, (New Haven, Connecticut: Yale University Press).
- Fishlow, Albert, 1985, “Lessons from the Past: Capital Markets During the 19th Century and the Interwar Period,” International Organization, Vol. 39, pp. 383–439.
- Lipson, Charles, 1985, Standing Guard: Protecting Foreign Capital in the Nineteenth and Twentieth Centuries, University of California Press, Berkeley.
- Suter, Christian, 1992, Debt Cycles in the World Economy: Foreign Loans, Financial Crises and Debt Settlements, 1820–1990, (Boulder, Colorado: Westview Press).
- Wynne, William, 1951, State Insolvency and Foreign Bondholders: Volume No. 2, Selected Case Histories of Governmental Foreign Defaults and Debt Readjustments (New Haven, Connecticut: Yale University Press).
- Borchard, Edwin M., 1951, State Insolvency and Foreign Bondholders: Volume 1, General Principles (New Haven, Connecticut: Yale University Press).
- Winkler, Max, 1933, Foreign Bonds: An Autopsy; a Study of Defaults and Repudations of Government Obligations (Philadelphia: Roland Swain Company).
- Morgan, E. Victor, and W. A. Thomas, 1969, The Stock Exchange: Its History and Functions, 2nd edition, Elek Books, London.
- Eichengreen, Barry, and Richard Portes, 1986, “Debt and Default in the 1930s: Causes and Consequences,” European Economic Review, Vol. 30, pp. 599–640.
- Eichengreen, Barry, and Richard Portes, 1988, “Les prêts internationaux dans l’entre-deux-guerres: le point de vue des porteurs de titres,” Economie Appliquée, Vol. 41, pp. 741–71.
- Eichengreen, Barry, and Richard Portes, 1989a, “After the Deluge: Default, Negotiations and Readjustment During the Interwar Years,” in The International Debt Crisis in Historical Perspective, ed. by Barry Eichengreen and Peter Lindert (Cambridge, Massachusetts: MIT Press).
- Eichengreen, Barry, and Richard Portes, 1989b, “Settling Defaults in the Era of Bond Finance,” World Bank Economic Review, Vol. 3, pp. 211–39.
- Kelly, Trish, 1998, “Ability to Pay in the Age of Pax Britannica, 1890–1914,” Explorations in Economic History, Vol. 35, pp. 31–58.
- Lindert, Peter and Peter Morton, 1989, “How Sovereign Debt Has Worked,” in Developing Country Debt and Economic Performance, ed. by Jeffery Sachs and Susan Collins, (Chicago, Illinois: University of Chicago Press).

### Sovereign debt theory, restructuring, and creditor coordination
- Bulow, Jeremy, and Kenneth Rogoff, 1989, “Sovereign Debt: Is to Forgive to Forget?” American Economic Review, Vol. 79, pp. 43–50.
- Eaton, Jonathan, and Mark Gersovitz, 1981, “Debt with Potential Repudiation: Theoretical and Empirical Analysis,” Review of Economic Studies, Vol. 48, pp. 289–309.
- Rogoff, Kenneth, and Jeromin Zettelmeyer, “Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976–2001,” Staff Papers, International Monetary Fund, Vol. 49, No. 3, pp. 470–507.
- Portes, Richard, 2000, “The Role of Institutions for Collective Action,” in Managing Financial and Corporate Distress: Lessons from Asia, ed. by Charles Adams, Robert Litan, and Michael Pomerleano (Washington, D.C.: Brookings Institution).
- Wright, Mark, 2000, “Sovereign Risk and Creditor Coordination,” unpublished manuscript, MIT.
- Buccheit, Lee, and Mitu Gulati, 2002, “Sovereign Bonds and the Collective Will,” Working Paper No. 34 (Washington: Georgetown University Law Center).
- Haldane, Andy, 1999, “Private sector involvement in financial crisis: analytics and public policy approaches,” Financial Stability Review, Vol. 7, pp. 184–202, Bank of England.
- Bolton, Patrick, and David Scharfstein, 1996, “Optimal Debt Structure and the Number of Creditors,” Journal of Political Economy, Vol. 104, pp. 1–25.
- La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny, 2000, “Investor Protection and Corporate Governance, Journal of Financial Economics, Vol. 58, pp. 3–27.
- Olson, Mancur, 1965, The Logic of Collective Action: Public Goods and the Theory of Groups, (Cambridge, Massachusetts: Harvard University Press).

### Empirical studies and spreads in emerging markets
- Mauro, Paolo, Nathan Sussman, and Yishay Yafeh, 2000, “Emerging Market Spreads: Then Versus Now,” IMF Working Paper 00/190 (Washington: International Monetary Fund).
- Mauro, Paolo, Nathan Sussman, and Yishay Yafeh, 2002, “Emerging Market Spreads: Then versus Now,” Quarterly Journal of Economics, Vol. 117, pp. 695–733.
- Buchanan, Michael, 2001, “Emerging Market Financing: A Retrospective,” EMEA Economics Analyst, Goldman Sachs (November 16), pp. 4–10.
- Singh, Manmohan, 2002, “Recovery Rates from Distressed Debt—Empirical Evidence from Chapter 11 Filings, International Litigation, and Recent Sovereign Debt Restructurings,” unpublished manuscript, International Monetary Fund.

### Legal, contractual, and institutional analyses of bond clauses and collective action
- Billyou, De Forest, 1948, “Corporate Mortgage Bonds and Majority Clauses,” Yale Law Journal, Vol. 57, pp. 595–611.
- Buccheit, Lee, and Mitu Gulati, 2002, “Sovereign Bonds and the Collective Will,” Working Paper No. 34 (Washington: Georgetown University Law Center).
- Becket, Torbjörn, Anthony Richards, and Yunyong Thaicharoen, 2002, “Bond Restructuring and Moral Hazard: Are Collective Action Clauses Costly?,” paper presented at the Third Annual Research Conference of the International Monetary Fund, Washington.
- Flandreau, Marc, and Nathan Sussman, 2002, “Old Sins: Exchange Clauses and European Foreign Lending in the 19th Century,” presented at the IADB Conference on “Currency and Maturity Matchmaking” Washington, D.C., November 21st.
- Macmillan, Rory, 1995a, “The Next Sovereign Debt Crisis,” Stanford Journal of International Law, Vol. 31, pp. 305–58.
- Macmillan, Rory, 1995b, “New Lease of Life for Bondholder Councils,” Financial Times, August 15.
- Buceheit, Lee, and Mitu Gulati, 2002, “Sovereign Bonds and the Collective Will,” Working Paper No. 34 (Washington: Georgetown University Law Center).

### IMF documents, policy proposals, and architecture
- International Monetary Fund, 1999, “Involving the Private Sector in Forestalling and Resolving Financial Crises—The Role of Creditor Committees—Preliminary Considerations,” SM/99/206.
- International Monetary Fund, 2001, “Involving the Private Sector in the Resolution of Financial Crises— Restructuring International Sovereign Bonds,” http://www.imf.org/external/pubs/ft/series/03/index.htm.
- International Monetary Fund, 2002, “Strengthening the International Financial Architecture: Sovereign Debt Restructuring Mechanism (SDRM) A Factsheet,” http://www.imf.org/external/np/exr/facts/sdrm.htm.
- International Monetary Fund, 2003, Communiqué of the International Monetary and Financial Committee of the Board of Governors, Washington, D.C. (April 12), http://www.imf.org/external/np/cm/2003/041203.htm.
- Krueger, Anne O., 2002, “A New Approach to Sovereign Debt Restructuring,” International Monetary Fund, www.imf.org/external/pubs/ft/exrp/sdrm/eng/index.htm.
- Singh, Manmohan, 2002, “Recovery Rates from Distressed Debt—Empirical Evidence from Chapter 11 Filings, International Litigation, and Recent Sovereign Debt Restructurings,” unpublished manuscript, International Monetary Fund.

### Analytical papers, working papers, and forthcoming manuscripts
- Bordo, Michael, and Barry Eichengreen, 2002, “Crises Now and Then: What Lessons from the Last Era of Financial Globalization?” NBER Working Paper No. 8716 (Cambridge, Massachusetts: National Bureau of Economic Research).
- Bordo, Michael, and Jongwoo Kim, 1998, “Was There Really an Earlier Period of International Financial Integration Comparable to Today?” NBER Working Paper No. 6738 (Cambridge, Massachusetts: National Bureau of Economic Research).
- Tomz, Michael, forthcoming, Sovereign Debt and International Cooperation: Reputational Reasons for Lending and Repayment, Book Manuscript, Stanford University.
- Marx, Daniel, 2003, “Sovereign Debt Restructuring: The Upcoming Case of Argentina,” unpublished paper presented at a conference on “Debt Restructuring in Argentina: The Road Ahead and Lessons for Emerging Markets,” InterAmerican Development Bank, Washington, D.C., March 31.
- Rajan, Raghuram G., and Luigi Zingales, 2001, “The Great Reversals: The Politics of Financial Development in the 20th Century,” NBER Working Paper 8178 (Cambridge, Massachusetts: National Bureau of Economic Research).
- Mauro, Paolo, Nathan Sussman, and Yishay Yafeh, 2000, “Emerging Market Spreads: Then Versus Now,” IMF Working Paper 00/190 (Washington: International Monetary Fund).

*Source: _wp03107 - REFERENCES*

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