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Finance and Trade: Issue Linkage and the Enforcement of International Debt Contracts
Unformatted Document Text:  36 accumulated a surplus in its clearing office, and under some agreements could redirect the surplus to bondholders By threatening or imposing clearing arrangements, Britain secured preferential treatment from Rumania and Germany. Britain and Rumania established a clearing in the late 1930s. Under the terms of the agreement, any surplus sterling that piled-up in the British clearing office could be transferred to British holders of Rumanian bonds. The United States had no such agreement with Rumania, which explains why British bondholders fared better than American ones. A similar situation arose with Germany. When Germany declared a moratorium on all long-term government bonds in June 1934, Britain threatened to impose a clearing. It proved unnecessary to carry out the threat, however. Under the Anglo-German transfer agreement of 1934, the British pledged not to establish a clearing, and Germany committed to pay full interest to British holders of Dawes and Young bonds. This British behavior smacks of trade sanctions, but it is important to keep the evidence in perspective. First, Britain never threatened to sever or even reduce trade with Rumania and Germany in response to default. Instead, it simply sequestered the surplus exchange that accumulated when those two debtors ran a trade surplus with Britain. Thus, the discrimination arose from a special form of currency rationing, rather than traditional trade sanctions. Second and more importantly, the Rumanian and German cases were unique. As Barry Eichengreen emphasizes, they “were exceptions to the rule. British officials generally rejected bondholders’ calls for commercial retaliation,” and American policymakers uniformly refused. 61 Nevertheless, many countries paid in full. Thus, evidence for the embargo hypothesis is surprisingly thin. 61 Eichengreen (1991: 160).

Authors: Tomz, Michael.
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36
accumulated a surplus in its clearing office, and under some agreements could redirect the
surplus to bondholders
By threatening or imposing clearing arrangements, Britain secured preferential treatment
from Rumania and Germany. Britain and Rumania established a clearing in the late 1930s.
Under the terms of the agreement, any surplus sterling that piled-up in the British clearing office
could be transferred to British holders of Rumanian bonds. The United States had no such
agreement with Rumania, which explains why British bondholders fared better than American
ones. A similar situation arose with Germany. When Germany declared a moratorium on all
long-term government bonds in June 1934, Britain threatened to impose a clearing. It proved
unnecessary to carry out the threat, however. Under the Anglo-German transfer agreement of
1934, the British pledged not to establish a clearing, and Germany committed to pay full interest
to British holders of Dawes and Young bonds.
This British behavior smacks of trade sanctions, but it is important to keep the evidence
in perspective. First, Britain never threatened to sever or even reduce trade with Rumania and
Germany in response to default. Instead, it simply sequestered the surplus exchange that
accumulated when those two debtors ran a trade surplus with Britain. Thus, the discrimination
arose from a special form of currency rationing, rather than traditional trade sanctions. Second
and more importantly, the Rumanian and German cases were unique. As Barry Eichengreen
emphasizes, they “were exceptions to the rule. British officials generally rejected bondholders’
calls for commercial retaliation,” and American policymakers uniformly refused.
61
Nevertheless, many countries paid in full. Thus, evidence for the embargo hypothesis is
surprisingly thin.

61
Eichengreen (1991: 160).


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