## Lending Resumption After Default: Lessons from Capital Markets During the 19th Century

_IMF Working Papers, July 1, 2006_

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## Bibliographic details
- Authors: Juan Sole
- Published: July 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451864366.001

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### Summary and central claim
- The paper mines the experience of capital markets during the 19th century to propose an alternative way of interpreting international default episodes.
- It challenges the standard view that defaulting on sovereign debt entails exclusion from capital markets by documenting multiple instances in which the reaction of lenders differed from the punishment story: in some cases lending ceased for long periods, but in others it was not interrupted.
- Central claim: the reaction of lenders after default stems from additional knowledge about the borrower that lenders acquire during these episodes; lenders resume or interrupt lending depending on what they learn.

### Model and mechanism
- The lending relationship is modeled in a costly state-verification environment in which governments have private information about their investment projects (good or bad).
- In the event of default, it is shown that it is worthwhile for lenders to acquire more information about the type of project.
- Lending is interrupted only if, after costly verification, the project is believed to be a bad one.

### Findings and implications
- Empirical observation: sovereign defaults in the 19th century were followed by heterogeneous lender responses—some defaults led to prolonged exclusion, others did not interrupt lending.
- Theoretical implication: exclusion from capital markets is not an automatic punishment; it can be conditional on the posterior beliefs lenders form about project quality after incurring verification costs.
- The paper reframes default episodes as information-revealing events that alter lenders’ beliefs and hence future lending decisions.

### Subject classification and keywords
- Subject: Consumption, Credit, Environment, International capital markets, Loans
- Keywords: disp-formula id, net present value, WP

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/lending-resumption-after-default-lessons-from-capital-markets-during-the-19th-century-19296_