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GunboatsandVultures: MarketReactiontotheEnforcementofSovereignDebt
LauraAlfaro
HBSandNBER
NoelMaurer
HBSandNBER
FaisalAhmed
UniversityofChicago
April
2010
Abstract: The reoccurring phenomenon of sovereign default has prompted an enormous theoretical
and empirical literature. Most of this research has focused on why countries ever chose to pay their
debts (or why private creditors ever expected repayment). The problem originates from the fact that
repaymentincentivesforsovereigndebtsareminimalsincelittlecanbeusedascollateralandtheability
ofacourttoforceasovereignentitytocomplyhasbeenextremelylimited,especiallygiventhelackofa
supranational legalauthoritycapableofenforcingcontractsacrossborders. Inthispaperwecontrast
themarketreactiontoattemptstoenforcesovereigndebtcontractsviaU.S.dollardiplomacyinLatin
AmericainthepreWorldWarIIperiodandbylegalactioninthe1990sandearly2000s. Wearguethat
dollardiplomacycreatedaneffectiveandcredibleenforcementregimewhilelegalactionsbycreditors,
conversely,donotappeartohavedoneso.
WhenpeopleaskmewhatImeanbystablegovernment,Itellthem,moneyatsixpercent.
GeneralLeonardWood
Weparticularlycondemntheperversitywherevulturefundspurchasedebtatareducedpriceandmakeaprofitfromsuing
thedebtorcountrytorecoverthefullamountowedamorallyoutrageousoutcome.
PrimeMinisterGordonBrown
Threethingsareeternal: death,taxes,andsovereigndefault. Thelatterisparticularlysurprisinginlight
ofthefactthatcreditorscontinuetoprovidebillionsofdollarsmorethan$130billionin2005
1of
creditstothegovernmentsofdevelopingcountries,despitealonganddoloroushistoryofsovereign
default. Whydocreditorscontinuetobelievethatsovereignswillrepaytheirdebts?2 Onemightim
aginethatthethreatoflosingaccesstofuturecreditmightbeenoughtodiscouragedefault,butthere
areampletheoreticalandempiricalreasonstobelieveotherwise.3 Studieshavefoundthatinvestorsdo
notdenycredittogovernmentswithahistoryofdefault,andtheinterestratepenaltieswhichdoarise
arenotsufficienttoinducerepayment. Currentparticipantsinthesovereigndebtmarketconfirmthese
1WorldBank,GlobalDevelopmentFinance.
2 ForoverviewsoftheliteratureseeEaton,J.andR.Fernandez,SovereignDebt,inHandbookofInternationalEconomicsVol.3,(Amsterdam,
NewYorkandOxford:Elsevier,NorthHolland,1995)editedbyGeneGrossmanandKennethRogoff,pp.20312077;Kletzer,K.1994.Sove
reignImmunityandInternationalLending,inTheHandbookofInternationalMacroeconomics,editedbyFrederickvanderPloeg,UnitedKing
dom:BasilBlackwellPublisher.3AlfaroandKanczuk(2005)showthattheinterestratepenaltiesthatactuallymaterializefollowingdefaultarenotnearlyenoughpunishment
tocausecountriestorepaytheirdebtsandfindthatfindthatadditionaloutputcostsofdefaultinginlinewitharenecessarytosustainthedebt
levelsobservedinemergingmarketseveninamodelofcontingentservices.Alfaro,L.,andF.Kanczuk,SovereignDebtasaContingentClaim:A
QuantitativeApproach,JournalofInternationalEconomics65,no.2(2005):297314.
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observations: forthem,Themarketshaveshortmemoriesispracticallyatruism.4 Inasmuchascoun
triesdorepaytheirdebts,itappearstobedueeithertotheirdomesticpoliticalinstitutions(ahardthing
toreplicate)orthehighoutputcostofdefaulting.5
Inaworldwheremarketshaveshortmemories,cansanctionsplayaroleinimprovingsovereign
debtmarkets? Legalsanctions,ofcourse,playakeyroleinsustainingprivatedebtmarkets. Defaulters
facethethreatofseizuresorgarnishmentsunlesstheycanmeetspecificbankruptcycriteria. Thepossi
bilityofsanctionsmakesdebtorslesslikelytodefault,whichhasthesalubriouseffectofreducingthe
costofcapitalandincreasingthevolumeoflending. Sovereigngovernmentsarefree,however,from
anysortofsupranationalauthoritythatmightenforcedebtcontracts. Intheory,however,applying
sanctionstogovernmentsshoulddecreasetheperceivedriskoflendingtothem,andthereforeincrease
lending. Inpractice,sanctionsagainstnominallyindependentdebtorgovernmentsappeartohave
played
a
role
in
sustaining
sovereign
debt
markets
before
1913.
Mitchener
and
Weidenmeir,
for
exam
ple,foundthatbetween1870and1913defaultinggovernmentsran40percentchanceoffacingforeign
intervention,eitherviagunboatenforcedblockadesor,morecommonly,theimpositionofforeigncon
trolovertheirdomesticfinancesunderthethreatofblockade.6 Inthemodernperiod,defaultsareas
sociatedwithdeclinesintradeandoutput,butthesedonotappeartobetheresultofanydeliberate
policybylenders. Rather,theyareahaphazardanddisorganizednegativesideeffectofdefault.7 Abet
terdesigneddebtenforcementregime,therefore,holdsoutthepossibilityofmakingsovereigndefault
morerareandlesscostly.8
DuringtheepochofDollarDiplomacy(roughly190429),theU.S.appliedwhatwasineffecta
strongdebtenforcementregimetothecircumCaribbeanregion. TheU.S.aimedtocreateastablein
ternationalregime: thatistosay,thegoalwastheeliminationofsovereigndefaultsratherthanacon
tinuingseriesofinterventions. First,theU.S.useditsinfluencetofacilitaterestructuring. TheU.S.bro
kerednegotiationswithColombiaandVenezuelain1905. In1913,theU.S.governmentarrangedadeal
inwhichGuatemalawouldstartpayinginterestonitsdefaulteddebts. In1923,theStateDepartment
sentamissiontoBogottoproposereformstoColombiasbankingsystem,taxcollection,andpublic
administration. Thelegislaturepassedtheproposedreforms,andtwomembersofthemissionstayed
onasemployeesoftheColombiangovernment.
4Lotsandlotsofciteshere.[COMPLETE]
5AlfaroandKanczuk(2005).
6KrisMitchenerandMarcWeidenmier,SupersanctionsandSovereignDebtRepayment,NBERWorkingPaper11472,June2005.
7AlfaroandKanczuk(2005).
8MartinezandSandlerishavecontestedthisresultontwogrounds: first,themechanismcausingthetradedeclineishardtofind,sinceno
countriesmakesanctioningdebtorsadeliberatepolicy;andsecond,theirinterpretationofthedataindicatesthatalltradewithallcountries
declinesafteradefault. ADDEXACTCITES
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Second,theU.S.arrangedcontrolledloans,inwhichthedebtorcountrypledgedtoallowtheU.S.
orU.S.appointedagentstotakeovertariffcollectionintheeventofdefault. TheU.S.tookoverthe
customhousesoftheDominicanRepublicin1905,Cubain1906(aspartofabroaderintervention),Ni
caraguain1911andHaitiin1915.TheU.S.arrangedacontrolledloanwithCostaRicain1911,butdid
nottakeoverthecustomhouses. Anadditionalloanin1926stipulatedthattheU.S.wouldtakeover
CostaRicasinternaltaxcollectionshoulditdefault. ElSalvadorsignedacontrolledloanin1912.In
1918,afterPanamausedtheproceedsfromarailroadloantomeetcurrentexpenses,theU.S.forced
thePanamaniangovernmenttoallowanAmericanfiscalagenttotakecontrolandchargeofthe
nationaltreasury. In1926,aloantoHondurasrequiredthecountrytoimposeadedicated3percent
exporttaxascollateral. Theenforcementmechanismwasingenious: exportersneededtopurchase
stampsequaltothetaxandthestampsweresoldexclusivelybytheNationalCityBankofNewYork.
Also
in
1926,
Peru
appointed
an
American
to
head
the
custom
service
as
a
condition
for
a
loan
and
Boli
viaacceptedateamofadvisorstomonitoritsfinances.
Third,theU.S.usedthemilitarytopreventinstabilityfromforcinggovernmentsintodefault. The
intervenednationsincludedCuba,theDominicanRepublic,Haiti,Honduras,Nicaragua,andPanama. In
threenationsCuba,theD.R.,andHaititheU.S.wentsofarastoadministerthemwhenlocalgov
ernmentscollapsed. TheU.S.ranCubain190609(andagainin1912and191722),Haitiin191534,
andtheD.R.in191624. InNicaragua,theU.S.neverformallytookover,butMarinesactivelyfought
antigovernmentinsurgentsin1912and192633. TheGreatDepressionbroughtDollarDiplomacytoan
end. AmericanadvisorstoBoliviabegantocalldefaultinevitableasearlyas1928,andtheyagreedto
suspensioninJanuary1931,aftera28percentfallinrevenues. Peru,Chile,andEcuadorsoonfollowed.
InOctober1931,AmericasdebtenforcementempireofficiallyclosedwhentheU.S.administratorsin
chargeofDominicanfinancesallowedthecountrytodefaultinthefaceofeconomiccollapse.
Today,thesocalledvulturefundshaveattemptedtocreateasimilardebtenforcementregime.
Moreproperlyknownasdistressedfunds,vultureshavetakenadvantageoflegalchangesthatgreatly
weakenedlegalsovereignimmunityinAmericaandEurope.9 Thevulturespurchasedefaultedsovereign
debtontheopenmarket. Theythensuethedefaultinggovernments. Ifsuccessful,AmericanandEuro
peanenforcetheirdecisionsbyattachinggovernmentrevenuesorotherpaymentsthatpassthrough
theircountries,ineffectimposingavirtualblockadethatisverydifficultfordefaultingcountriesto
9SeeRogoff,K.andJ.Zettelmeyer,2002,BankruptcyProceduresforSovereigns:AHistoryofIdeas,19762001,IMFStaffPapers49,470
507; Alfaro,L.andI.Vogel. CreditorActivisminSovereignDebt:VultureTacticsorMarketBackbone?HarvardBusinessSchoolCaseNo.
706057(2007); Sturzenegger,F.andJ.Zettelmeyer(2007),DebtDefaultsandLessonsfromaDecade,MITPress.
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avoidwithoutincurringhighcosts. Inoneinfamouscase,vulturefundsattemptedtoattachVATpay
mentsandlandingfeesfromU.S.basedairlinestothegovernmentofNicaragua.Vultureshavealso
goneafteroilsales,privatizationrevenues,andotherfinancialflowspassingthroughAmericanandEu
ropeanpaymentssystems.
Infact,thepunishmentfromattachmentcanexceedthemonetaryvalueoftheattachmentitself. In
Peru,forexample,thevultureswentafterinterestpaymentsonthecountrysBradybonds. Hadthese
paymentsbeenattached,PerusBradybondswouldhavegoneintodefault.WhywouldthePeruvian
governmentfearadefaultonitsBradybondswhenitwasalreadyindefaultonsomanyothersecuri
ties? ThereasonisthatadefaultonBradybondswouldhavemadeitimpossibleforprivatelymanaged
mutualfundstoinvestinanysortofPeruviansecurityunderU.S.lawwhichwouldhaveforcedfire
salesofPeruviansecuritiesofallsortsandpromptedaseverefinancialcrisis. Virtualblockadescanbe
serious
indeed.
Thevultureshaveattractedagreatdealofopprobriumfortakingadvantageofpoorcountries.Ac
tivists,NGOs,journalists,andthePrimeMinisteroftheUnitedKingdomhavecondemnedthevultures
fortakingadvantageofpoorcountries. InGordonBrownswords,Weparticularlycondemntheper
versitywherevulturefundspurchasedebtatareducedpriceandmakeaprofitfromsuingthedebtor
countrytorecoverthefullamountowed amorallyoutrageousoutcome. Asomewhatdifferentcriti
quehasemergedfromtheIMFandWorldBank: thevulturesinterferewiththeorderlyrestructuringof
sovereigndebt.10 Thereasonisthatthehopeoflegalrestitutionprovidestheownersofdefaulteddebt
withanincentivetoholdoutfromparticipatinginanorderlydebtrestructuring. Moreover,debtholders
mayworrythatthecourtswillgrantthevulturesaclaimonthedebtorgovernmentsresourceswitha
higherprioritythantheirown.(Evenifthecourtsdonotdosoexplicitly,thegovernmentmaydecideto
paythevulturesinsteadofothercreditorsinordertoforestallavirtualblockade.)Inthatcase,deb
tholderswillbemorelikelytoimmediatelyselltheirdebtholdingsintheeventofacrisis. Runningfor
theexits,however,willcausetheinterestratesfacedbytheborrowertorise,furtherdecreasingthe
probabilityofrepayment.
Vulturesalsohavetheirdefenders. Inthisview,thethreatofsuccessfullitigationhelpsmaintainthe
viabilityofsovereigndebtmarketsbyreinforcingcreditorrights.11 Thevulturesprovideamarketfor
otherwiseilliquidassets. Theymakelendingtodevelopingcountrygovernmentscheaperbyincreasing
10AnneKrueger,NewApproachestoSovereignDebtRestructuring:AnUpdateonOurThinking,speechdeliveredatInternationalMonetary
FundConferenceonSovereignDebtWorkouts:HopesandHazardsInstituteforInternationalEconomics,WashingtonDC,April1,2002,avail
ableathttp://www.imf.org/external/np/speeches/2002/040102.htm,accessedOctober24,200611
SeeScott(2006).HalS.Scott,2006.SovereignDebtDefaults:CryfortheUnitedStates,NotArgentina,WashingtonLegalFoundation,Criti
calLegalIssues,WorkingPaperSeriesNo.140,September.
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thesanctionssuchgovernmentsfaceintheeventofdefault. Vulturefundmanagersbelievethatthey
provideacriticalcheckonwillingnesstopayconstraintondebtrepayments. JayNewman,forexam
ple,isclearthathisfunddoesnotgoaftercountriesthattrulycannotpay,butcorrupt,deadbeatcoun
triesthataredraggingourlegalsystemdownbydisregardingtheruleoflaw.12 Otherbelievedthat
thethreatoflitigationmadesovereignlendingcheaper.13Thisviewgarneredsupportamong
U.S.lawmakers: inMay2009,Rep.EricMassa(DNY),introducedtheJudgmentEvadingFor
eignStatesAccountabilityAct,whichmadatedthatforeignstates(andtheircorporations)that
havebeenindefaultofU.S.judgmentsexceeding$100millionformorethantwoyearsbede
niedaccesstoU.S.capitalmarketsandrequiredthattheadministrationexplainwhyitdeserved
aid,inadditiontomandatingthatanyaidgrantedbearnoticethatthecountryisajudgment
evadingstate.14
Absentinthisdebatearetwoquestions. First,arethevultureseffective? Inotherwords,isthe
threatofavirtualblockadeincreasesovereignincentivetorepayenoughtoincreaseinvestorconfi
denceinthesecurityofsovereigndebt? Ifthevulturesdecreaseinvestorconfidenceinalargeandsus
tainedway,thentheiropponentshaveastrongargumentthatthevulturesinterferewithsovereign
debtrestructuringsandtheiractivitiesshouldbecurtailed. Ontheotherhand,ifthevulturesdonot
matter,thentheiropponentsaremakingamountainoutofamolehill. Second,againstwhatshouldthe
vulturesbebenchmarked?Perhapsnopossibledebtenforcementregimemightbeeffective,inwhich
casetherewouldbelittleargumentinfavorofstrengtheiningthecurrentone.Thepossibilityofusing
sanctionstoimprovesovereigndebtmarketsmaybenothingmorethananirvanathesis.
Inordertotestthehypotheses,twothingsareneeded: alogicalframeworkanddata. Howwould
weexpecttobondspreads(against,say,U.S.Treasuries)toreactunderacredibledebtenforcement
regime?First,wewouldexpecttoseealargedropinspreadswhentheregimebeginsforthecountries
thataresubjecttoit. Second,everytimetherewasanintervention(bytheU.S.governmentorthe
courts),wewouldexpecttoseeatemporaryriseinyieldsforbondsissuedbythecountriesunderthe
regimethatwerenotbeingintervened,untilitbecomesclearthattheinterventionhassucceeded. At
thatpoint,wewouldexpectyieldstodrop.TouseametaphorfromBrooklyn,thelogicisthatofafor
merlycrimeriddenneighborhoodinwhichanincreaseinthepolicepresencehassucceededinreducing
mayhem. Whenresidentsofsuchaneighborhoodseethepoliceoutsideaneighborshouse,lights
12Bosco,p.38.
13 SeeScott(2006).HalS.Scott,2006.SovereignDebtDefaults:CryfortheUnitedStates,NotArgentina,WashingtonLegalFoundation,Criti
calLegalIssues,WorkingPaperSeriesNo.140,September.14
Forthebillstext,seehttp://www.govtrack.us/congress/bill.xpd?bill=h1112493,accessedonJanuary5th
,2010.
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flashingandgunsdrawn,theywillbecomenervousuntilitbecomesclearthattheperpetratorshave
beenapprehended,oratleastuntilitbecomesclearthattheenforcementactiondoesnotportendan
increaseincrime. Investors,weexpect,shouldreacttodebtenforcementactionsunderacredible
debtenforcementregimeliketheneighborhoodresidentsreacttocrimeenforcementactionsundera
crediblecrimeenforcementregime.
Howwouldweexpectspreadstoreactunderanoncredibledebtenforcementregime?Wewould
expecttoseenochangeinyieldswhentheregimefirstcameintobeing.Norwouldweexpecttoseea
reactionfromdebtenforcementinterventions.Afterall,iftheactionswerenotexpectedtochangebe
havioreitherbecausetheenforcementistoounpredictableorbecausethesanctionsaretooweak
thentheholdersofthebondsofthirdcountrieswillgainnoinformationfromastabilizationoren
forcementaction.
We
therefore
benchmark
the
vultures
against
the
dollar
diplomacy
of
the
early
20th
century.
We
beginbyfollowingMitchenerandWeidenmeirsstudyofthedeclarationoftheRooseveltCorollary,and
comparetheeffectofthebeginningofboththedollardiplomacyandthevultureregimes. Didtheini
tialactionthatstartedeachregimeTeddyRooseveltsactiontostabilizetheDominicanRepublicin
1905andElliottAssociatessuitagainstPerin1993generatealargeandsustaineddropininvestor
perceptionsoftheriskofLatinAmericansovereigndebt? (Forcomparisonssake,welimitourstudyto
LatinAmericanissues.) Inordertodeterminewhethertheinitialeventcreatedaregime,weexamine
theeffectoninvestorperceptionsregardingissuesotherthanthoseoftheintervenedcountry. Didthe
initialeventchangeinvestorexpectationsaboutsovereigndebtingeneral?
Wethenexaminetheeffectoflaterinterventions. (Inthedollardiplomacyregime,interventions
areU.S.actionstostabilizegovernmentsortakecontroloftheirfinances,e.g.,militaryinterventionsor
theappointmentofsomesortoffiscalagent. Inthevultureregime,interventionsaredecisionsby
AmericanorEuropeancourtstoattachfundflowstosovereigndebtors.) Inaneffectiveandcredible
debtenforcementregime,laterinterventionsshouldrevealunanticipatedinformation. Thatis,thefact
theU.S.neededtointerveneinonecountryshouldrevealnegativepoliticalandeconomicinformation
toinvestors. Afterall,inaperfectregime,nointerventionshouldbenecessarybeyondthefirstone. If
theregimeretainsitscredibility,however,thenthenegativeeffectoflaterinterventionsshouldbe
shortlivedasinvestorsregaintheirconfidencethattheregimecancopewiththeshock. Inacredible
debtenforcementregime,therefore,investorexpectationsofrepaymentshouldimprovemarkedlyand
sustainedlywhentheregimebegins,andlaterinterventionsshouldproducesmallandshortliveddrops
ininvestorexpectationwhennegativeinformationisrevealed.Notethatinthisframeworkinterven
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tionsdonotandmostU.S.interventionsunderdollardiplomacywerenothavetobesanctions
aimedatdefaultingregimes.Rather,theyweremostly(withafewexceptions)aimedatpreservingsta
bilityandinsuringthattheintervenedregimewouldcontinuetomakegoodonitsobligation.Theywere
prophylactic,notpunishment.
WefindthatDollarDiplomacyunliketodaysvulturescreatedaneffectiveandcrediblere
gime. InlinewiththeresultsfromMitchenerandWeidenmeir,theinitialinterventionundertheregime
generatedalargeandsustainedfallininvestorperceptionsofthedefaultriskofthebondsoftheLatin
Americancountriessubjecttotheregime. Thisdropindefaultriskwassustaineduntilthelate1920s,
despitestatementsbytheU.S.governmentthatitintendedtogetoutofthedebtenforcementbusi
ness. Vultures,conversely,donotappeartohavecreatedacredibledebtenforcementregime. Mostof
ourspecificationsshownoeffect,althoughwehavebeenabletofindastatisticallysignificantbutsmall
and
transient
negative
effect
on
investor
expectations
of
default
risk.
The
implication
is
that
neither
the
fearsofthevulturesopponentsnorthehopesoftheirsupportersarejustifiedbythedata: intheeyes
ofinvestors,wehaveseenneitherareturntothehalcyondaysofTeddyRoosevelt(withoutthevi
olence)noraperniciousinterferenceintheabilitytorestructurethedebtsofpoorcountriesthatfind
themselvesunabletomakepayments. Wenotethatouranalysisdoesnotcommentdirectlyonthe
welfareimplicationsassociatedwiththeenforcementofsovereigndebt. Indeed,ourresultsareconsis
tentwithmanyofthefindingsintheliterature,andshouldbeinterpretedaspositivestatements,notas
normativeones.
GUNBOATS
Ifanationshowsthatitknowshowtoactwithreasonableefficiencyanddecencyinsocialandpoliticalmatters,ifitkeeps
orderandpaysitsobligations,itneedfearnointerferencefromtheUnitedStates.Chronicwrongdoing,oranimpotencewhich
resultsinagenerallooseningofthetiesofcivilizedsociety,mayinAmerica,aselsewhere,ultimatelyrequireinterventionby
somecivilizednation,andintheWesternHemispheretheadherenceoftheUnitedStatestotheMonroeDoctrinemayforce
theUnitedStates,howeverreluctantly,inflagrantcasesofsuchwrongdoingorimpotence,totheexerciseofaninternational
policepower.
PresidentTheodoreRoosevelt,20May1904
OnDecember6th,1904,PresidentRooseveltdeclaredthattheUnitedStateswouldexerciseaninter
national
police
power
across
the
Western
Hemisphere
in
order
to
insure
that
countries
kept
order
and
paidtheirobligations. TheinitialreasonforRooseveltsdecisiontoannouncethenewpolicywasthe
fearthatchronicdisorderwouldleadtodebtdefaults,whichwouldinturnprovideapretextforEuro
peanintervention.
Europeaninterventionwasnotadistanttheoreticalabstraction. In1899,CiprianoCastroseized
powerinVenezuelaafterabriefcivilwar. Castrosgovernmentconfiscatedforeignownedproperty,
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leviedvoluntarycontributionsonresidentEuropeans,occupiedadisputedislandbetweenVenezuela
andTrinidad,seizeddozensofBritishflaggedfishingvessels,andinterferedwithBritishshippingin
theCaribbean.15 Inaddition,Castrodefaultedonthecountrysforeigndebts. Asaresult,aBritish
GermanItaliancoalitionblockadedVenezuelanportsandseizedthecountryscustomhousesinDecem
ber1902. CastrobackeddowninFebruary1903,andtheHagueTribunalgrantedfirstpreferenceon
VenezuelandebtuntiltheVenezuelangovernmentpaid30percentofthetotalclaimsagainstit.
TheVenezuelanincidentsettwobadprecedentsfromtheAmericanpointofview. First,itindicated
thatEuropeanpowerswouldinterveneinthishemispheretoprotectthesecurityoftheirinvestments.
Second,suchinterventionswouldhavetheeffectofprivilegingEuropeanbondholdersoverAmerican
ones. Muchasmodernholdersofdefaulteddebtworrythatthevulturefundsvirtualblockadeswill
givethevulturesdebtpriorityandleaveotherdebtholderswithnothing,U.S.creditorsfearedthatEu
ropean
military
actions
would
give
European
claims
priority
and
leave
them
with
nothing.
DollarDiplomacyBegins
TheRooseveltCorollarycommittedtheU.S.toinsuringthatLatinAmericandebtorswouldbeable
topaytheirobligations. TheU.S.reluctantlyimplementedtheCorollaryin1904asaresultofthesitua
tionintheDominicanRepublic. TheD.R.hadbeeninastateofcivilwarsince1899,andthecountryde
faultedonitsdebts. AmidsignsofapossibleEuropeanintervention,theU.S.Navyselectivelybombard
edrebelcontrolledtownsinFebruary1904anddemandedthatthewarringfactionssitdowntowork
outtheirdifferences. Rooseveltsimultaneousorderedaspecialpresidentialcommissiontoundertakea
full,impartial,searchingaccountoftheDominicansituation.16 InMarch,thecommissionrecommend
edthattheUnitedStatesassumecontrolofDominicancustomhousesandpaytheDominicangovern
ment$1mfortheuseofa(strategicallyunnecessary)navalbaseinSamanBay. Withlimitedsupport
forinterventionintheUnitedStatesmemoriesofthe18981902PhilippineWarwerestillfresh
Rooseveltdemurred,preferringtoputofftheactionuntilthenecessitybecamesoclearthateventhe
blindestcanseeit.17
Unfortunately,thenecessityofactionsoonbecameclear. AmericanagentsinSantoDomingourged
theU.S.totakeoverDominicancustomhouses,fearingthatiftheU.S.didnot,Europeangovernments
wouldblockade,worseningthechaoswhichhadalreadykilledseveralAmericans.18 (Infact,theagents
15A.M.Lowe,VenezuelaandthePowers,TheAmericanMonthlyReviewofReviews,JanuaryJune1903,p.42.
16RoosevelttoGeorgeDewey,20February1904,inMorison,LettersofTheodoreRoosevelt4:734.
17RoosevelttoCharlesW.Eliot,inMorison,LettersofTheodoreRoosevelt4:770.
18Munro,InterventionandDollarDiplomacy,9394.PowelltoHay,16and18April1904,andPowelltoP.Castillo,17and19April1904,inDD,
M93,roll11;HaytoPowell,4May1904,inDiplomaticInstructionsoftheDepartmentofState[INS],M77,roll98,RG59.
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wentsofarastosuggesttotheirsuperiorsthattheybeallowedtotakeoverthecustomsoftheirown
accord,givingWashingtonplausibledeniability.)19 Evenintheabsenceofablockade,theU.S.worried
thatEuropeanpowersmightattempttosecuretheirfinancialinterestsbysupplyingweaponstovarious
factionsinthecivilwar.20 Theseworrieswerenotunfounded: inApril,PresidentCarlosMoralessettled
hisdebtswithItaliancreditorsusingfundspledgedtoFrenchandBelgiumbondholders.21
OnMay20th,1904,RooseveltofficiallyproclaimedtheCorollary. U.S.navalofficersanddiplomatic
personnelbrokeredapeaceagreementbetweenthewarringfactionsinJune.22 PresidentCarlosMo
ralessgovernmentpromisedtorestartpaymentsonitsdebtsinNovember.23 Unfortunately,withan
nualrevenuesof$1.85millionagainst$0.9millioninarrearsandobligationsof$1.7millioncomingdue
in1905(notincludingannualexpensesof$1.3million,ratherimportantconsideringtheneedtopaythe
armyinthemidstofanongoinginsurgency),itseemedhighlyunlikelythattheDominicanRepublic
would
be
able
to
comply.
24
Morales
asked
the
U.S.
to
take
control
of
the
countrys
customhouses,
as
longasitcouldguaranteeenoughrevenuetokeepthegovernmentoperational.25 Rooseveltresisted
MoralessentreatiesuntiltheItaliangovernmentsentabluntrequesttoWashingtononDecember24th,
1904,demandingthattheU.S.eitherassumetheobligationtopayItalianclaimsorpermitRometocol
lectthequotadueherdirectlyfromthecustomhousesoftheRepublic.26
OnJanuary20th,1905,theU.S.andtheD.R.concludedanagreementtoplaceDominicancustom
collectionunderAmericanmanagement. AlayerofAmericanofficialswouldassumecontroloverthe
customsagency,reportingdirectlytotheDominicanpresident. TheU.S.woulduseamaximumof55
percentoftherevenuestomakedebtpayments,andremittheremaindertotheDominicangovern
ment. TheagreementalsopreventedSantoDomingofromissuingnewdebtorchangingtariffrates
withoutAmericanapproval.27 RooseveltsubmittedtheagreementtotheSenateonFebruary7th. Itis
supremelytoourinterestthatallthecommunitiesimmediatelysouthofusshouldbeorbecomepros
perousandstable,andthereforenotmerelyinname,butinfactindependentandselfgoverning.28
TheSenate,however,rejectedthemeasure. OnMarch24,therefore,theDominicanfinanceminister
submittedaproposaltohaveanAmericantakeovermanagementofDominicancustomswithoutatrea19
Dillingham
to
SN,
18
April
1904,
CCR,
entry
40,
p.
137.
20DillinghamtoSN,19April1904,SDCG,entry305,pp.12.
21Dawson,"ChronologyofPoliticalEvents,"595;MacMichael,"UnitedStatesandtheDominicanRepublic,"164.Hollander,DebtofSantoDo
mingo,127.DillinghamtoSN,19April1904,SDCG,entry305,pp.12.22
Rippy,HAHR,Vol.17,Nov1937,p.419.23
DawsontoHay,September12,1904.24
DawsontoHay,September12,1904.25
DawsontoHay,Oct.6,1904.26
RoosevelttoBishop,February23,1904,inJosephBishop,TheodoreRooseveltandHisTimeShowninHisOwnLetters.Volume:1.C.Scribn
er'sSons,NewYork,1920,p.431,andMunro,p.98.27
Munro,p.101.28
FRUS,1905,pp.334342.
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10
ty.29 Rooseveltaccepted,andonMarch31staretiredAmericancolonel,GeorgeColton,tookoverthe
administrationofthecountryscustomsagency.30 Rooseveltexplainedthenewpolicyinaspeechin
Chautauqua,NewYork: Thiscountrywouldcertainlynotbewillingtogotowartopreventaforeign
governmentfromcollectingajustdebtortobackuponeofoursisterrepublicsinarefusaltopayjust
debts,andthealternativemayinanycaseprovetobethatweshallourselvesundertaketobringabout
somearrangementbywhichsomuchasispossibleofthejustobligationsshallbepaid.31
BondholdersreactedpositivelytotheCorollary. OnApril5th,1905,JamesCooper,thesecretaryof
theCorporationofForeignBondholdersreported,ThesecuritiesofSouthandCentralAmericanrepub
licswhichashorttimeagowerespokenofasrubbishandtobecarefullyavoidedbyallbutthemost
hardenedspeculatorsarenowapparentlyregardedasrapidlyapproachingthepositionofgiltedged
securities. CooperwentontoattributetherisetoU.S.debtenforcement. Therisesthathaveoc
curred
appear
to
be
largely
due
to
the
idea
that
the
United
States
is
going
to
intervene
in
some
way
so
astomakeallthesedefaultingcountriespaytheirdebtstherecentactionoftheUnitedStatesexecu
tiveinSantoDomingowasregardedasconfirmationofthisidea.32
DollarDiplomacyinAction
HowdidtheUnitedStatescontinuetoenforcefinancialstabilityinLatinAmericaafter1905? Figure
1showsthatCircumCaribbeanbondspreadsremainedlowuntilthelate1920s. TheU.S.exercisedits
powerinthreeways. First,theU.S.useditsdiplomaticinfluencetofacilitatedebtsettlements. Follow
ingitsinterventionintheDominicanRepublic,theU.S.helpedbrokersettlementswithColombiaand
Venezuelain1905.33 In1913,afteraworrisomevisitbyaBritishwarship,theU.S.governmentarranged
adealinwhichGuatemalawouldstartpayinginterestonitsdefaulteddebts,butaccruedarrearswould
beforgiven.34 In1923,theStateDepartmentsentamissiontoBogottoproposereformstoColombias
bankingsystem,taxcollection,andpublicadministration. TheColombianlegislaturepassedallofthe
proposedreforms,andtwomembersofthemissionstayedonasemployeesoftheColombiangovern
ment. Inreturn,BlairandCompanyunderwroteanewloantotheColombiangovernment.35 Latermis
sionsrangedoutsidetheCircumCaribbeantovisitChile,Bolivia,Ecuador,andPeru.
Second,theU.S.arrangedcontrolledloans,inwhichthedebtorpledgedtoallowtheU.S.totake
overcustomscollectionintheeventofadefault. Intwocases(notincludingthe1905interventionin
29FRUS,1905,p.358.
30FRUS,1905,p.366.
31TrustsMustSubmittoLawRoosevelt,NYT,12August1905,p.3.
32SouthAmericanBondsupOver100PerCent,NYT,5April1905.
33Mitchener,Empire,p.686.
34LaughlintoKnox,Jan.28,1913. FRUS,1913,p.565.
35Rosenberg,FromColonialismtoProfessionalism,inDrake,p.72.
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11
theD.R.),theU.S.hadtofollowthroughonitspledge: Nicaraguain1911andHaitiin1915.Infourother
cases,theU.S.tookcontroloffiscalpolicybeforedefaultoccurred. In1918,afterPanamausedthe
proceedsfromarailroadloantomeetcurrentexpenses,theU.S.pressuredthePanamaniangovern
mentintoallowinganAmericanfiscalagenttotakecontrolandchargeofthenationaltreasury.36
In
1926,aloancontractwithHondurasrequiredthecountrytoimposeadedicated3percentexporttaxto
collateralizetheloan. TheloanwascollateralizedbycollectingthetaxrevenueinNewYork: exporters
neededtopurchasespecialstampsequaltothetaxdueinordertoexport,andsuchstampsweresold
exclusivelybytheNationalCityBankofNewYork. TheU.S.governmentagreednottoadmitHonduran
importsunlesstheyhadpaidthetax.37 Finally,in1926,PeragreedtoappointanAmericantoheadthe
customserviceasaconditionforaloanfromtheGuarantyTrustCompany.38 TheU.S.arrangedtwo
controlledloanswithCostaRicain1911and1926,butdidnothavetofollowthrough.39 Inaddition,El
Salvador
signed
a
controlled
loan
in
1912
which
allowed
the
lenders
to
appoint
a
fiscal
agent
to
monitor
customscollection,buttheagentwouldonlytakeoverthecustomhousesintheeventofdefault.40
Third,theU.S.usedmilitaryforcetopreventinternalconflictfromforcinggovernmentsintodefault.
TheintervenednationsincludedCostaRica,Cuba,theDominicanRepublic,Haiti,Honduras,Mexico,Ni
caragua,andPanama. InthreeofthosenationsCuba,theD.R.,andHaititheU.S.wentsofarasto
occupyandadministerthemwhenthelocalgovernmentscollapsed. TheU.S.ranCubain190609(and
againin1912and191722),Haitiin191534,andtheD.R.in191624. InNicaragua,theU.S.neverfor
mallytookoverthegovernment,butU.S.Marinesactivelyfoughtantigovernmentinsurgentsin1912
and192633. Inaddition,theU.S.workedtopromoteinterstatepeaceintheregion,particularlyinCen
tralAmerica. TheU.S.brokeredthe1907PeaceConferencewhichledtotheestablishmentoftheCen
tralAmericanCourtofJustice. ItlaterintervenedwhenexpansionistgovernmentsinNicaraguathreat
enedthepeaceandlandedtroopsontheCostaRicaPanamaborderin1925toforestallconflict.
ThereweregapsinAmericandollardiplomacy. Threeattemptsatcontrolledloansfailedduringthe
period.In1910,aUnitedFruitbackedcoupoustedPresidentMiguelDvilaofHonduras. Dvilassuc
cessor,MiguelBonilla,backedoutofa1909agreementtoplacecustomsadministrationunderU.S.con
36
Major,Possession,pp.13940.37
ChesterJones,TheCaribbeanSince1900,PrenticeHall: NewYork,1936,pp.43233.38
Rosenberg,FromColonialismtoProfessionalism,inDrake,p.71.39
The1926loanstipulatedthattheU.S.wouldtakeovertheCostaRicasinternaltaxcollectionintheeventofdefault.Inaddition,thecontract
stipulatedthatdisputeswouldbesubmittedtotheChiefJusticeoftheSupremeCourtoftheUnitedStatesforbindingarbitration. LaRepublica
deCostaRicaandCentralUnionTrustCompanyofNewYorkasTrustee,TrustAgreement,November1,1926.40
Intheeventofdefault,thefiscalagentwouldnominatetwopeopletotakecontrolofthecustomservices. TheSalvadoreangovernment
wouldthenselectoneofthemafterrunningthedecisionthroughtheofficeoftheSecretaryofStateoftheUnitedStatesanydisagreement,
questionordifferenceofanynaturewhateverwouldbereferredtothebindingauthorityoftheU.S.ChiefJustice. JuanFranciscoParedesto
CharlesEvansHughes,Oct.20,1921,NationalArchives,RecordGroup59,816.51/176.
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GunboatsandVultures
12
trol. (BonillathencancelledvariousAmericanownedrailroadandwharfconcessions,andUnitedFruit
offeredtorefinancethecountrysdebtinreturnforthem. OppositionfromtheU.S.government,how
ever,meantthatthenewloanwasnevermade.41) In1913,theU.S.failedtopersuadeGuatemalato
includeanexplicitsanctioningmechanisminitsdebtsettlement. Finally,in1922acontrolledloanto
Boliviaprovokedafirestormofopposition(particularlywhenthesizeofthe9pointspreadthattheun
derwriterswouldearnbecamepublic)andtheBoliviangovernmentbackedoutofthedeal.42 Argentina,
Brazil,andChile(andpresumablyUruguayandParaguay),meanwhile,wereneverconsideredtargetsfor
Americandebtenforcement,partiallybecausetheywereconsideredmoreresponsible,butmostly
becausethosecountrieswereconsideredabletodefendthemselvesagainstintervention.
WastheAmericanregimeinthecircumCaribbeancredible? Investorshadreasonstodoubtthe
U.S.commitment. PoliticiansregularlymadepublicproclamationsthattheUnitedStateswasnolonger
in
the
debt
enforcement
business.
Warren
Harding,
for
example,
promised
to
withdraw
U.S.
troops
fromtheDominicanRepublicinhis1920campaign. (Hedidnotfollowthrough.) Ontheotherhand,the
StateDepartmentinsistedonvettingallLatinAmericansovereignbondissuesinU.S.markets,which
manyobserversinterpretedasanunofficialguarantee,andCalvinCoolidgeproclaimedina1927:
Whileitiswellestablishedinternationallawthatwehavenorighttointerfereinthepurelydomesticaf
fairsofothernationsintheirdealingswiththeirowncitizens,itisequallywellestablishedthatourGov
ernmenthascertainrightsoverandcertaindutiestowardourowncitizensandtheirproperty,whatever
theymaybelocated.Thepersonandpropertyofacitizenareapartofthegeneraldomainofthenation,
evenwhenabroad.Ontheotherhand,thereisadistinctandbindingobligationonthepartofselfrespec
tinggovernmentstoaffordprotectiontothepersonsandpropertyoftheircitizens,wherevertheymaybe.
This
is
both
because
it
has
an
interest
in
them
and
because
it
has
an
obligation
toward
them.
It
would
seem
tobeperfectlyobviousthatifitiswrongtomurderandpillagewithintheconfinesoftheUnitedStates,it
isequallywrongoutsideourborders.Thefundamentallawsofjusticeareuniversalintheirapplication.
Theserightsgowiththecitizen.Whereverhegoesthesedutiesofourgovernmentmustfollowhim.43
EmpiricalAnalysis
Inordertoanalyzemarketperceptionsofdefaultrisk,weanalyzetheeffectontheperceivedmar
ketriskinnonintervened(orspillover)LatinAmericancountriesfollowinginterventionintheperiod
1900to1929. Thatistosay,weexcludedebtissuedbytheinterveninggovernmentitself.
Weendouranalysisin1929,whentheDepressionpromptedHerbertHoovertodisavowdollardip
lomacy. BoliviawasthefirstLatincountrytodefault,inJanuary1931,inthewakeofa28percentfallin
taxrevenuesandasubsequentmilitarycoup. AmericanadvisorstotheBoliviangovernmentbegancall
ingadefaultinevitableasearlyas1928andtacitlybegantoencourgeBoliviatocometosomesortof
41Munro,p.235.
42Rosenberg,FromColonialismtoProfessionalism,inDrake,p.70.
43JohnT.WoolleyandGerhardPeters,TheAmericanPresidencyProject[online].SantaBarbara,CA:UniversityofCalifornia(hosted),Gerhard
Peters(database).AvailablefromWorldWideWeb:(http://www.presidency.ucsb.edu/ws/?pid=419).
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13
arrangementwithitscreditors.Peru(whichwasunderAmericansupervision)andChileandEcuador
(whichwerenot)soonfollowed.44 InOctober,theeraofdebtenforcementofficiallycametoanend
whentheU.S.administratorsinchargeofDominicanfinancesagreedtoallowthecountrytodefaultin
thefaceofamassivedeclineinexportrevenues.45
Weusespreadsasourmeasureofperceivedmarketrisk.Wecalculategovernmentbondyieldrates
fromthemonthlyopeningbondpricesaslistedineditionsoftheInvestorsMonthlyManualforvarious
LatinAmericancountries.WesubtractthemonthlyvaluesoftheU.S.longterminterestratefromeach
countrysyieldratetocalculatethespread. ThesourceoftheU.S.longtermrateistheGlobalFinancial
Database. Table1presentsmainsummarystatisticsforouryieldseries.
TABLE1AROUNDHERE
WebeginbytestingthehypothesisthatthedeclarationoftheRooseveltCorollaryinMay1904
caused
a
change
in
regime
and
had
a
lasting
effect
on
Latin
American
bond
spreads.
Following
Mitchen
erandWeidenmeir,weconsidertheeffectsontheLatinAmericancountriesasawholeandasmaller
subsetofCircumCaribbeancountrieswhichfellunderAmericanprotection.46 Wetestedthesignific
anceoftheMay1904datewithourgunboatsdataforvariousepisodewindows: onemonth,three
months,sixmonths,andoneyearaftertheannouncement.47
FIGURE1,TABLE2ANDTABLE3AROUNDHERE
Intheveryshortterm(1and3monthwindows)thereisasmallandinsignificantpositiveeffecton
bondspreadsfollowingthedeclarationof0.0to0.3percentagepoints. Inthelongerterm,however,
theeffectoftheCorollaryonspreadsbecomesnegativeandsignificant,consistentwiththehypothesis
thattheCorollarychangedinvestorexpectations. TheeffectislargerfortheCircumCaribbeancoun
triesmostsubjecttodebtenforcement,andquitesmall(veryclosetozero)inmagnitudeforArgentina,
Brazil,andChile.48 Inaddition,wetestedfora1904structuralbreakinthetimeseriesonthespreadsof
CircumCaribbeanbondseriesusingaconventionalWaldtestfora1,3,6,and12monthwindowofthe
declaration.49 ForallthewindowstheFtestissignificantatthe.01levelindicatingthepresenceofa
44OnU.S.fearsofaBoliviandefault,seeStateDepartmentRecords(RecordGroup59),NationalArchives,MemorandumfromtheEconomic
Adviserof9May1928,NA824.511449. OntheU.S.governmentsdecisiontopreventarestructuringoftheBoliviandebt,seeFINDCITEIN
CONTRERAS45
USCustomsReceivershipReports.46
Inourdataset,theseareColombia,CostaRica,Guatemala,Nicaragua,Honduras,andVenezuela.47
MitchenerandWeidenmier usedweeklysovereigndebtbondpricesfromtheLondonStockExchangeandtestforabnormalreturnsfollow
ingthedeclaration. Weusemonthlyfrequencydataandcalculateyieldsandthenestimatetheeffectofthedeclarationonbondyields. When
abondwasindefault,weusedthenotionalyield;thedefaultedcouponovertheactualmarketprice.48
Ourcoefficientresultsdonotchangewhenwealsocontrolwithyeartrend*countrydummies.49
Basically,weinteractallRHSvariableswithadummyforthedateofthebreakanduseajointFtesttodeterminethesignificance.
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GunboatsandVultures
14
structuralbreakafterMay1904.TheresultconfirmedMitchenerandWeidenmeir(andtheeyeballeco
nometricsinFigure1)after1904,CircumCaribbeanbondspreadsweresignificantlylower.
WethencodedU.S.interventionsinLatinAmericancountriesfortheperiod19001929. Formilitary
interventions,thesedateswerecompiledfromvariousWarDepartmentreportsattheNationalArchives
andBenjaminBeede,ed.,TheWarof1898andU.S.Interventions,18981934: AnEncyclopedia. For
controlledloans,weusedthedatenegotiationsbeganandthedateonwhich(ifnecessary)American
fiscalagentstookoverfinancialsupervision.
TABLE4AROUNDHERE
Figure1presentsspreadsfor3setsofcountries:allcountries(Argentina,Brazil,Chile,Colombia,
CostaRica,Cuba,ElSalvador,Guatemala,Honduras,Mexico,Nicaragua,Paraguay,Peru,Uruguay,and
Venezuela);CircumCaribbeancountries(Colombia,CostaRica,Cuba,ElSalvador,Guatemala,Hondu
ras,
Nicaragua,
and
Venezuela);
and
the
ABC
countries
(Argentina,
Brazil
and
Chile).
We
use
the
ABC
countriesasabaseline,sincetheywereconsideredbetterrisksthantheCircumCaribbeancountriesat
thebeginningofthedollardiplomacyperiod,andneveratriskofAmericaninterventionforbothprac
ticalandpoliticalreasons.Weattemptedtoisolatespillovereffectswherewehaveexcludedinter
venedcountryobservationsina12monthwindowaroundtheintervention.50Forthemostpartthespil
loverseriesandourcompleteseriesmovetogether,butthereareasexpected,somedifferencesinthe
seriesaroundtheinterventiondates. Theaveragemonthlyspreadforourbaselinecountriesislower
thanthosefortheCircumCaribbeancountries. TogaugewhetherU.S.gunboatdiplomacyhadanyef
fectoninvestorperceptions,weuseeventregression.51
Methodology
Ourfirststepwastoconstructtherelevanteventwindow.Supposecountryiisintervenedindatet.
Measuringtheimpactoftheeventonthespillovercountrieswouldrequireregressingthespreadona
constant,asetofcontrolsandadummythatwouldpickuptheeffectoftheinvasionatt. Theshorter
theeventwindow,thelowerthechancethattheresultsaredrivenbyotherevents.Wearelimited,
however,bythefactthatourbonddataismonthly.52 Nevertheless,givenlags,aonemonthwindow
maynotfullypickupthemarketreactiontotheinvasion.Assuchwepresentalsoresultsforwindowsof
50ThefigurewasconstructingbyexcludingdatafortheintervenedcountriesforTmonths beforeandaftertheintervention,withT[1=.
12].WepresentresultsforT=151
CITATIONS52
Inaddition,controldataisgenerallynotavailableathigherfrequencies(mostisavailableonlyyearly).Inthemoderncontext,Errunzaand
Miller(1998)andHenry(2000)argueinfavororbroaderwindowsinemergingmarketsastheremightbewidespreadinformationleakageprior
tomanyevents.Also,aswearguelaterinthetext,evenifwehadhigherfrequencydataitishardtocontrolformanypoliticaleventswhich
spanformorethanoneday,weeksorevenmonths.
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GunboatsandVultures
15
onemonthto12months. (The12monthwindowhasthefurtheradvantageofallowingustoincorpo
ratemacrocontrols: exports,thetermsoftrade(whereavailable),andgovernmentrevenues.)
Themagnitudeandstatisticaleffectonspreadsofthespillovercountriesfollowingtheinterven
tionofcountryareevaluatedbyestimatedthefollowingpanelregression:
Spreadit=i+Interventiontt+Controlsit+t + it (1)
whereInterventionitisadummyvariablethattakesonthevalueof1onoraftertheepisode(i.e.,month
ofandmonthsafterintervention) forT=112andSpreaditismeasuredinpercentagepoints. Weex
cludedatafortheintervenedcountryforTperiods(i.e.,months)beforeandaftertheintervention,with
T[1=.12]. ireferstocountrydummieswhichcapturetimeinvariantcountryspecificfactorswhich
maydrivecrosscountrydifferencesinspreads.tisavectoroftimedummiesincludedtocontrolfor
crosscountrycorrelationovertimeduetocommonworldshocksanditisanerrorterm.53
Somespeci
ficationsincludealsocountryspecificperiodtrends.Perceiveddefaultriskor/governmentsdesiretopay
areintricatelylinkedwiththemacroeconomy,hence,whenusingyearlyevents(duetodatarestric
tions),wealsoaddasetofcountryspecificmacroeconomiccontrolvariablestoaccountforotherva
riablesthatmayaffectdifferenceinspreads. TheestimationprocedureusesWhitescorrectionforhe
teroskedasticityintheerrortermanderrorsareclusteredatthecountrylevel.54
Results
Table5presentsmainresultsforthesampleofCaribbeancountriesColumn(1)presentsresults
controllingforcountryandtimeperiodeffectswhilecolumn(2)Weincludecountryspecifictimetrends
aswellascountryandperiodfixedeffects.Wefindapositiveandsignificanteffectonspreadsfollowing
U.S.gunboatintervention.Thisresultsuggeststhatmarketstendtoassigngreatdefaultriskinnearby
countries. Ourresultsarealsoeconomicallysignificantintermsoftheimpliedimpactonspreadsbefore
andafterintervention.55 Theestimatesincolumn(1)implya0.165percentagepointincreaseinspread
53 Weperformedsomesimpleteststocheckfornonstationaryvariablesinthedata(inparticularspreads).Severalunitroottestshavebeen
extendedtopaneldata,andinparticulartolargeNpaneldatasetssuchastheoneusedinthispaper.(SeeBaltagi(2001)foranoverviewof
non
stationary
panels).
Data
limitations
(in
terms
of
obtaining
data
for
all
countries
all
periods
as
to
construct
a
balanced
panel)
limited
the
use
ofmanyofthesetests. WeperformmedDickeyFuller(DF)andAugmentedDickeyFuller(ADF)testontheaveragespreaddataasacheckon
stationarity. Underdifferentspecifications(e.g.,numberoflaggedterms,theinclusionofatimetrend,etc)weconsistentlyfoundthatnounit
rootwaspresentintheaveragemonthlyCaribbeanandLatinAmericanspreads.54
Oneconcernthatemergesfromtheseresultsisthattheestimationofequation(1)isthatourstandarderrorsmaybebiaseddownwarddue
tothefactthatthedependentvariablesmaybepositivelyseriallycorrelated.Inaddition,ourmainindependentvariableisbyconstruction
highlyseriallycorrelated,exacerbatingthedownwardbiasinstandarderrors.WefollowthesolutionsproposedinBHLandBertand,Duflo,and
Mullainathan(2004),performingaseriesofteststoaddressthisissue.AsBertand,Duflo,andMullainathan(2004)emphasize,othersolutions
typicallyemployedtoaddressserialcorrelationissuesarenotappropriateforthetypeofpaneldatausedinthisstudy.Henceallspecifications
adjuststandarderrorsallowingforcountryclusteredheteroskedasticyandautocorrelation55
WepresentresultsexcludingTperiodsofintervenedcountrydata. Resultarerobusttoexcludingoneyearofobservations(aroundinterven
tiondate)forintervenedcountryasawaytomakesureresultsarenotdrivenbyeventsinsuchcountry.
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16
onemonthfollowinganintervention.(Theannualizedresultis120.165=1.98percentagepoints).
Thecoefficientestimatesincolumns(2)and(3)aresimilarinmagnitudeandsignificance.
TABLE5AROUNDHERE
TimingofEffectandDynamics
Animportantconcernfromthepreviousanalysisiswhetherthedatesareacleardemarcationbe
tweendistinctperiods.Arelatedissueiswhethertherearepotentialtrendsinthedata(renderingour
resultsspurious).Table6comparesspreadonemonthbeforeandafterspreadsuggestingthatthereis
indeedachangeinspreadfollowingintervention.
TABLE6AROUNDHERE
Tofurtheraddressthisconcern,weexplorethedynamicsoftherelationshipillustratedintheinitial
regressions.Inparticular,werunthefollowingregression:
(Spreadit)
=
i+
1PreInv3it
+
2PreInv2it
+
3PreInv1it
+
0InvDateit
+1PostInv1it
+
2PostInv2it
+
3PostInv3it + 3PostInv12it + +Controlsit+Dt +it
wherePreInv1it,PreInv2it,andPreInv3ittakethevalueofonerespectivelyinthefirst,second,andthird
periodsbeforecountryiisinvadedandzerootherwise,InvDateittakesthevalueofoneintheperiodin
whichcountryiisinvadeddatesandzeroineveryotherperiod;PostInv1it,PostInv2it,PostInv3it,and
PostInv12ittakethevalueofonerespectivelyinthefirst,second,thirdandtwelveperiod(month)after
invasionandzerootherwise.TheresultsinTable7useWhitescorrectionforheteroskedasticityinthe
errortermandclusterederrorsatthecountrylevel.56
TABLE7AROUNDHERE
Couldtherebeathirdfactorcorrelatedwith,butindependentof,Americaninterventionthat
changedmarketconfidence? Webelievereservecausalitynottobeasanimportantconcernitis
hardtobelievethatthefuturespreadonsovereignbondspromptedU.S.policymakerstodecidetoin
tervene. Omittedvariables,ontheotherhand,areaconcern. Inparticular,itmaybethecasethatre
cessionscausedbothincreasesinbondspreadsandpromptedmilitaryinterventions. Wehavecon
trolledforvariablesthatmightinfluencethepolicymakerstiminginopeningupthemarkets,including
laggedGDPgrowth.
Inconclusion,theevidencefrombondyieldsisconsistentwiththehypothesisthatU.S.dollardip
lomacyprovidedacredibledebtenforcementregime. Thebeginningoftheregimesawalargeandsus
taineddropinthebondspreadsofthecountriesmostsubjecttoAmericandebtenforcement. Later
interventionsrevealedinformationaboutnegativeshockstoinvestorsifgovernmentsprovokedaU.S.
56Resultsexcludesimilardataforintervenedcountry;resultsrobusttoexcludingoneyearofdataofintervened country.
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17
intervention(eitherbymisbehavingorthreateningtocollapse),thenthethreattothevalueoftheir
bondholdingsmustbeveryserious.
VULTURES
Thecompactbetweenborrowersandlendersisthatdebtcontractsareenforceable. Ifasovereignisheldtoadifferentstan
dardofenforceability,itvitiatesthecontractanderodesboththeruleoflawandconfidenceintheU.S.judicialsystem. Inthe
longrun,whatismoreimportanttotheU.S.economy: enforcingcontractsinaccordancewiththeirtermsorpermittingasmall
selfinterestedgroupofdefaultingregimestoredefineoursystemofcontractlaw?
JayNewmanofElliotAssociates
GunboatdiplomacyofthesortthattheU.S.engagedinduringtheearly20thcenturyisprobablycer
tainlynotcomingback,althoughrecenteventsconcerningBrazilianinvestmentsinSouthAmericamay
createroomfordoubt.57 Theremaybe,however,akinderandgentlerwayofaccomplishingthesame
result: thevulturefund. ThevulturefundsuseAmericanandEuropeancourtstoenforcesovereign
debtcontracts. Theypurchasedefaultedsovereigndebtinthesecondarymarket. Thevulturesthensue
thedefaultingcountryintheU.S.orE.U. Thecourtsystemthenenforcesdecisionsthatfavorthevul
turesbyattachingassetsorflowsoffundsofthedefaultinggovernmentthatpassunderitsjurisdiction.
Theemergenceofmodernvulturing,therefore,requiredtwopreconditions: first,thecreationofanac
tivesecondarymarketinemergingmarketsovereigndebtissues;andsecond,thatAmericanandEuro
peancourtsrelaxthedoctrineofabsolutesovereignimmunity.
SecondaryMarketsandSovereignImmunity
TheGreatDepressionandSecondWorldWarkilledoffthemarketforLatinAmericansovereign
debtsecurities. WhenprivatelendingonceagainbegantoflowtoLatinAmerica(andtoalesserextent
tothenewlyindependentcountriesofAsiaandAfrica)inthe1960s,ittooktheformoflendingbybanks
orconsortiumsofbanks. The1982debtcrisis,however,leftthebankswithbillionsofdollarsofnonper
formingsovereigndebtontheirbooks. The1989BradyPlan,namedafterU.S.TreasurySecretaryNi
cholasBrady,arrangedforthebanksandtheirdebtorstowritedowntheiroutstandingloansinarrears,
andthenexchangethemfornewlyissuedlongtermdollardenominatedbonds,withprincipalandone
yearsworthofinterestpaymentssecuredbyU.S.Treasurynotes. Intotal,Bradydealsrestructured
57InarecentspatbetweenBrazilandEcuadorovertheoperationsofOdebrecht,aBrazilianconstructionfirm,theBraziliangovernmentwith
drewitsambassadorandthreatenedQuitowitheconomicsanctionsuntiltheEcuadoreansbackeddown.InasimilardisagreementwithBolivia,
theBrazilianpresidentsupportedLaPazsattempttoraisetaxesonPetrobras,aBraziliancompanyextractinggasinBoliviaseasternprovinces,
buttheforeignministerbluntlystatedthatshouldBoliviaalterthepriceorquantityprovisionsofthecontract,thenBrasiliawouldhaveno
choicebuttorecognizetheeasternsecessionists.
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18
$202.8billionofdebtfor18countries. Theresultwas$63.7billionofdebtreliefandthecreationof
anactivesecondarymarketinbondsissuedbydevelopingcountrygovernments.
Modernvulturefundsrequiredoneothercondition,however: theabilitytouseAmericanandEu
ropeancourtstosanctionsovereigns. Underthedoctrineofabsolutesovereignimmunity,whichheldin
mostcountriesuntilSecondWorldWar,statescannotbesuedinthecourtsofanothersovereignstate.
AbsolutesovereignimmunityheldeventheduringtheDollarDiplomacyperiod. Infact,intheabsence
ofabsolutesovereignimmunitytherewouldhavebeennoneedtoincludespecialarbitrationandpu
nishmentprovisionsinthecontrolledloans.
AbsolutesovereignimmunitybecameaproblemaftertheSecondWorldWar,asgovernmentsand
governmentownedcompaniesincreasinglyengagedincrossbordercommercialactivities. Privatefirms
complainedthatsovereignimmunityputthematadisadvantagewhendealingwithstateownedcom
petitors.
Belgium
and
Italy
were
the
first
countries
to
deny
sovereign
immunity
in
such
cases.
Switzer
land,France,Austria,andGreecefollowed.58
TheU.S.joinedthebandwagonin1952,whenStateDepartmentdeclaredthattheU.S.nolongerac
ceptedabsolutesovereignimmunityintheTateLetter. TheLetterstatedthatstateswerenotimmune
withrespecttoclaimsarisingoutofactivitiesofthekindthatmaybecarriedonbyprivatepersons.
TheU.S.issuedtheletterfortworeasons. First,thewidespreadandincreasingpracticeonthepartof
governmentsofengagingincommercialactivitiesmakesnecessaryapracticewhichwillenablepersons
doingbusinesswiththemtohavetheirrightsdeterminedinthecourts. Second,thegrantingofsove
reignimmunitytoforeigngovernmentsinthecourtsoftheUnitedStatesismostinconsistentwiththe
actionofthegovernmentoftheUnitedStatesinsubjectingitselftosuitinthesesamecourtsinboth
contractandtort.59
Unfortunately,theStateDepartmentinterpretedtheTateLetterinaconfusingandcontradictory
manner,usuallyallowingpoliticalconsiderationstoguideitsdecisions.60 Othergovernmentsacted
equallyinconsistently. TheresultinguncertaintysurroundingsovereignimmunityledtheCouncilofEu
ropetonegotiateaconventionontheissuein1963. Theresultwasthe1972EuropeanConventionon
StateImmunity,whichcodifiedthecircumstancesunderwhichsovereignimmunitydidnotapply.61
Austria,Belgium,Cyprus,andtheNetherlandsratifiedtheConventionalmostimmediately.62 TheU.S.
didnotratifytheConvention,butCongresspassedtheForeignSovereignImmunityAct(FSIA)in1976,
58 JackTatetoJamesMcGranery,May19,1952,DepartmentofStateBulletin24.
59 JackTatetoJamesMcGranery,May19,1952,DepartmentofStateBulletin24. Italicsintheoriginal.
60TomMcNamara,APrimeronForeignSovereignImmunity,DavisGraham&StubbsLLP,March8,2006 Colorado,USA.
61JohnO'Brien,InternationalLaw,RoutledgeCavendish2001,p.290.
62http://conventions.coe.int/Treaty/Commun/ChercheSig.asp?NT=074&CM=8&DF=&CL=ENG.
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whichwrotemostofitsstipulationsintoAmericanlaw.63 TheFSIAwaivedsovereignimmunityinnine
situations:(1)waiver;(2)commercialactivity;(3)expropriation;(4)propertyintheUnitedStates;(5)
tortinjuryoccurringintheUnitedStates;(6)arbitration;(7)torture,extrajudicialkilling,sabotage,or
kidnapping;(8)enforcementofamaritimelien;and(9)foreclosureofamaritimemortgage.64 Britain
adoptedEuropeanConventionwiththeStateImmunityActof1978,andby1990Australia,Canada,
Germany,Luxembourg,Pakistan,Singapore,SouthAfrica,andSwitzerland,hadeitheradoptedtheEu
ropeanConventionorpassedsimilarlawsembodyingitsprecepts.
TheFSIAdidnotmentionsovereigndebt,butU.S.courtseventuallybroughtitunderthepurviewof
thelaw. AlliedBankbecamethefirstcreditortousetheFSIAtosueasovereignin1982,whenCosta
Ricadefaultedonthedebtitoweda39bankconsortiumtowhichAlliedbelonged. CostaRicaargued
thattheinternaldecresspreventingpaymentsqualifiedasactsofstate,andthereforecouldnotbechal
lenged
in
a
foreign
court.
The
courts
found
for
Allied
in
1985,
but
the
U.S.
government
pressured
the
bankintosettlingonthesametermsastheother38creditors.65 Thenextyear,in1986,Argentinas
centralbankdefaultedonaseriesofdollardenominatedbondsthatithadissuedin1982torefinance
existingdebts. TwoPanamaniancorporationsandaSwissbanksuedinNewYork. In1992,theU.S.Su
premeCourtdecidedruledintheirfavorinWeltoverv.RepublicofArgentina: sovereignbondissuesin
theUnitedStatesqualifiedascommercialactivities,andstateimmunitydidnotautomaticallyapply.66
Weltoverusheredintheageofmodernvulturing. In1992,theDartfamilyacquireddefaultedBrazil
ianpublicdebtwithafacevalueof$1.4billionatasteepdiscount.TheDartsrejectedaBrazilianofferto
restructurethedebtundertheBradyPlan. Rather,theysued. InMay1995,aNewYorkcourtsided
withtheDarts. Thenextyear,Brazilsettled,payingtheDarts$77millioninpastdueinterest. TheDarts
thensoldthedebtfor$1.1billion;lessthanthefacevalueofthedebt,butmorethanthatreceivedby
theparticipantsintheBradyrestructuring. TheDartcaseconfirmedthevulturesrighttolitigateonthe
basisofaclaimacquiredinthesecondarymarket. Italsoconfirmedthatvulturefundsdidnotviolate
Section489oftheNewYorkJudiciaryLaw,whichostensiblyprohibitedthepurchaseofaclaimwiththe
expresspurposeofbringingalawsuit,adoctrinecalledchamperty. TheDartssuccessfullyarguedthat
theyhadpurchasedthedebtwiththeintentionofreceivinginterest,notofbringingalawsuit.67
63AkeyfeatureoftheFISAisthatitpermitscountriestowaivesovereignimmunityinmanycommercialtransactions.Mostdeveloping
countrygovernmentdebtcontractsafter1976havecontainedexplicitwaiversofsovereignimmunity.]ORp.35364
TomMcNamara,APrimeronForeignSovereignImmunity,DavisGraham&StubbsLLP,March8,2006 Colorado,USA.65
SturzeneggerandZettlemeyer, DebtDefaultsandLessonsfromaDecadeofCrises,p.65.66
RepublicofArgentinav.Weltover,Inc.,504U.S.607(1992).67
SturzeneggerandZettlemeyer, DebtDefaultsandLessonsfromaDecadeofCrises,p.69.
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Thecourtsenforceddecisionsinfavorofthevulturesbyattachingassetsorflowsoffundsthat
passedthroughtheirjurisdictions. In1997,forexample,ElliottAssociatessuccessfullysuedPanamafor
thefullfacevalueof$70millionofdefaulteddebt,forwhichithadpaid$17.5million. WhenPanama
balkedatpaying,ajudgeattachedtheproceedsfroma$232millionsaleofthecountrystelecomscom
panytoCableandWirelessPLC. Twoyearslater,in1999,Elliottobtainedaprejudgmentattachment
orderagainstPeruviancommercialassetsintheUnitedStates. Itlaterreceiveda$57millionjudgment
initsfavor. PerudidnothavemanycommercialassetswithintheUnitedStates,butaBrusselsappeal
courtagreedtoattachinterestpaymentsonPerusBradybonds. Ratherthandefaultonitsentirestock
ofBradybonds,thePeruviangovernmentpaidElliott$63.5million.68
Thevulturessuccessengenderedstrongopposition. Thestrongestcameonhumanitariangrounds.
LianaCisneros,headoftheLatinAmericanCampaignofJubilee2000anactivistorganizationthat
sought
to
convince
leaders
of
G
7
countries
to
forgive
the
debt
of
the
worlds
poorest
countries
ar
gued: Thesepeoplearetradinginhumanmisery.ElliottAssociates,L.P.,arepickingoverthebonesof
thePeruvianeconomylikeapackofvultures.Itmaybejustbusinesstothem,buttothePeruviansit
representsschoolbooks,medicine,andcleanwater.TheU.S.Treasurymustinvestigatethiscaseasa
matterofurgencyandtakeimmediatestepstostopthesescandalouspractices. GordonBrownand
othermajorWesternpoliticiansagreed.
Moresurprisingly,perhaps,theIMFalsoagreedthatthevultureswerepernicious,albeitforadif
ferentreason. AnneKruegerdenouncedElliottdirectly. Themorerecentsuccessofanaggressivelegal
strategyemployedagainstPerubyavulturecompanycalledElliottAssociatesunderlinesthepowerthat
holdoutcreditorsretain. Thethreatofdisruptionremainslikelytodetercountriesfromseekingane
cessaryrestructuringforlongerthanisdesirableeitherforthecountryitselforfortheinternational
community....ItisnotclearifElliottsstrategywouldsurvivelegalchallengeinfuturecases.Butthis
caseandthepossibilitythatroguecreditorswillopenotherlegalavenuesshinesaspotlighton
whatisamissingelementintheinternationalcommunityscurrentapproachtotherolesofthepublic
andprivatesectorsindebtrestructuring. Shefearedthatthevulturesmightprovokecreditorruns,
inwhichindividualcreditorswoulddeclinetoparticipateinrestructuringanunsustainablesovereign
debtburdeninthehopethattheycouldgetthecourtstoattachpaymentsaheadofothercreditors. In
extremis,suchcreditorrunscouldprovoketheverydefaultthatthecreditorshopedtoavoid,andwind
upwithfewerresourcesforeveryone.69
68Alfaro,p.9.
69Barnett,Galvis,andGouriage1984.
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21
Absentinthisdebate,however,isonekeyquestion: doesvulturingwork? Ournullhypothesisis
thatvulturesareperceivedbyinvestorstobeineffective,certainlycomparedtodollardiplomacy. In
otherwords,ournullhypothesisisthatthereisnovultureregimeinthewaythattherewasadollardip
lomacyregime. Inthenextsectionwetestthishypothesis.
EmpiricalAnalysis
OurdatasetonemergingmarketsovereignbondsaredrawnfromJ.P.MorganandconsistsofU.S.
dollardenominateddailytradedEMBI(EmergingMarketsBondIndex)plusbondyields. EMBIspreads
arethemostcloselywatchedindicatorsofemergingmarketsbymarketparticipantsandhavebeen
widelyusedbyresearchersinpreviouswork(e.g.,Mauroetal,2002).70 EMBIdataisavailablefora
largenumberofemergingmarketsinAsia,Africa,Europe,andLatinAmericabutforcomparabilityto
our
historic
gunboats
analysis
we
look
at
bond
spreads
from
Latin
American
countries.
We
examine
the
availablespreadsfromDecember1993untilMay2007forBrazil,Colombia,Ecuador,Mexico,Panama,
Peru,andVenezuela.71
Perhapsoneofthemostchallengingfeaturesinascertainingtheeconomiceffectsfromvulturing
activityiscorrectlyidentifyingtheappropriateeventdates. Thereisnocentraldatabasedocumenting
thelegalhistoryofvultureactivity. Oneofthemostwidelyciteddocumentsintheliteraturecontaining
alistofrecentvulturecasesisbySingh(2003). However,uponverificationofthedateslistedinthat
paperwediscoveredthatmanyofthemwereincorrect. Infact,manyofthemwerenotevencasesin
volvingvulturing,althoughthedocumentwasusefulinidentifyingtheactorsinsomeofthemajorvul
turelegaldisputes.
Wecompiledourownoriginaldatasetofcasefilingandsettlementdates,andifavailabledatesof
attachment. WeusedtheJuryVerdicts,Settlements&JudgmentdirectoryintheLexisNexisResearch
Software7.2databaseandreadthroughtherelevantcasehistoriestodiscernthecasedates. Unfortu
nately,thisdatabasedidnotcontainalltherelevantdates. WethereforesearchedthroughtheWes
tlawdatabaseandnewspaperandlawjournalarticlestoidentifytheremainingcasedates.72 Wewere
abletoidentifyandverifythefilingandsettlement/attachmentdatesyear,month,anddayforfive
LatinAmericanvulturecases(i.e.,atotalof10events,listedinthetopofTable8),thusourresults
70Mauro,Mauro,NathanSussmanandYishayYafeh. 2002. EmergingMarketSpreads: ThenVersusNow. TheQuarterlyJournalofEconom
ics,May:695733.71
Notallofthesecountrieshavetraded/issuedEMBIbondssinceDecember1994. TableYYliststhedatacoverageforoursetofSouthAmeri
cancountries.72
Wewereabletoidentify(andconfirm)mostofourdatesintheWallStreetJournalandtheNewYorkTimes.
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22
shouldbetakenasverypreliminary.73 Inmostinstances,thedateofattachmentcoincideswiththeset
tlementdate. Webelievethesefivecasesareagoodfirstpassinevaluatingtheimpactofvulturelaw
suitsoninvestorperceptionsintheLatinAmericanEMBImarketastheyhavebeenthemostwidelydo
cumentedvulturecasesintheexistingliteratureandhavereceivedthemostpublicmediaattention
(Singh,2003;SturzeneggerandZettelmeyer,2007). Moreover,theamountsuedhasnotbeentrivial
theDartfamily,forexample,suedArgentinaforover$750million.
TABLE8AROUNDHERE
WeidentifiedthePeruviancasetobethefirstone. Wasthecourts1996decisioninPravinv.Peru
themodernequivalentofTeddyRooseveltsdecisiontotakeoverthefinancesoftheDominicanRepub
lic? WeknowthattheRooseveltCorollaryproducedahugeandlonglastingchangeinperceivedrisk
fromholdingthesovereigndebtoftheCircumCaribbeancountries. DidthesamethinghappentoLatin
AmericancountrieswhenElliotttriedtoinaugurateakinderandgentlerdebtenforcementregime? The
answerseemstobeno.
FIGURE2AROUNDHERE
Table10,PanelApresentsourmainresults.Inallthespecifications,ourdependentvariableisthe
dailyvalueoftheEMBIplusspreadforeachcountrymeasuredinpercentageunits. AswehaveEMBI
spreadsatthedailyfrequency,weredefinetherelevantepisodewindowsas4weeks,2weeks,1week,
and1dayafterthedateofvulturingactivity. Inthiscontext,definingsmallereventepisodesallowsus
tobetterpinpointthemarketeffectifanyofvulturingactivity.74 Ourregressionsexcludeobserva
tionsfortheintervenedcountryepisodesfortherelevanteventwindow,thuswearecapturingthe
spillovereffectsintheLatinAmericanEMBImarketfollowingvulturingactivity.AsseeninTable9,Panel
A,aneventstudyanalysisoftheeffectofthePeruattachmenthadanegativebutnotsignificanteffect.
TABLE9AROUNDHERE
AskepticalreadermayarguethatthisparticularPerucasedidnotcreatearegime,butperhapsthe
cumulativeeffectoflatersuccessfulattachmentscreatedaregime. Henceweanalyzedthemarketper
ceptionofthedifferentsuccessfulattachments(knowntoustodate)andfoundaveryweakresult. As
seeninTable9,PanelB,wefindanegativeeffect,buttheresultsarenotsignificantatconventionalle
vels.
73 Narrowingdowntheactualdayoffilingandsettlementprovedespeciallytedious. Mostoftheexistingliteraturelistsatmosttheyearand
monthoffilingandsettlement. Thecurrentversionofthepaperhasthecasesforwhichwecouldverifyinformation.74
Asarobustnesscheck,wealsoestimatedourregressionsusingtheaveragemonthlyEMBIspreadfor1,3,6,and12monthwindowsandfind
verylittleeffectofvulturingactivity(thecoefficientsignsarepositive,butnotstatisticallysignificant). Theresultswithlongerwindowsare
consistentwiththeresultsreportedinthetext.
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23
Anevenmoreskepticalreadermightarguethatitmightbethecasethatinformationwasrevealed
beforetheactualattachmentdate.75Thatistosay,perhapsinvestorscouldidentifywhichvulturecases
weregoingtoobtainfavorablerulingsbeforetherulingsweremade. Inthatcase,therelevantevent
datewouldnotbethedatethejudgeruledinfavorofattachment,butthedatewhenthecasewasfiled.
IftheIMFiscorrectandinvestorsfearedthatsuccessfulvulturingwouldreducetheirchanceofobtain
ingasettlementwiththesovereign,thenthevalueofthedebtshoulddecreaseatthedateoffiling,and
theEMBIshouldcorrespondinglyincrease. Ontheotherhand,ifthevultureswererecreatingadollar
diplomacyregime,thenonewouldexpectthevalueofdebttoincrease,andtheEMBItofall.
InTable9,PanelC, wereporttheresultsoftestingtheeffectsontheEMBIspreadforLatinAmeri
cancountriesusingthefilingdateofcasesthateventuallyresultedinsuccessfulattachments. Weare
abletoteaseout,onaverage,aonepercentagepointdropintheEMBIspread. Theresultissignificant
at
ten
percent
when
we
open
the
window
to
one
week
up
to
4
weeks,
but
small
in
magnitude.
Table
10
considerstheshortrundynamics. Wefindasmallandstatisticallysignificantdropinspreadsfollowing
theevent,buttheeffectdoesnotseemtobelonglasting. VulturinginLatinAmericaproducedatbesta
shortlivedandrelativelysmallreductiononLatinAmericanEMBIspreads.
Didother,unsuccessfulattachmentsproduceasimilarriseinthepricesofLatinAmericansovereign
debt? Thatis,doourpreviousfindingsholdonlyforcasesthatsucceeded,oraretheytrueforcases
thatfailedorhavenotyetmaterialized? Wehavenotsofarobtainedthefulluniverseofvulturefilings,
butwehaveobtainedthedatesforvariouslitigationcasesincludingtheArgentinecasesthatoutside
observersbelieveareunlikelytosucceed,andwedonotfindasignificanteffect.
CONCLUSION
Ourevidencesuggeststhattheremaybeavultureregime,butitisveryweakatbestcomparedto
thedollardiplomacyoftheearly20th. Tosomeextent,thisresultshouldnotbesurprising. Repre
sentativeMassanotwithstanding,theactivitiesofthevulturefundshavereceivedlittlesupportfrom
governmentsintherichworld. Belgium,forexample,altereditslawafterElliottsucceededinattaching
Peruvian
payments
that
passed
through
the
Euroclear
system.
The
World
Bank
has
also
strongly
come
outagainstthevultures,declaringonMay31,2007,Wecallonallofficialandcommercialcreditorsto
providetheirshareofdebtrelieftoHIPC{HighIndebtedPoorCountries]countriesandtoavoidselling
75Ofcourse,onedrawbackofthetraditionaleventstudymethodologyistheincapabilitytodetecttheimpactwhentheevendateisuncertain
(orinformationprotractsforalongperiod).
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24
theirclaimsonHIPCcountriestoothercreditorswhodonotintendtoprovidedebtrelief.76 TheParis
Clubgroupofcreditorgovernmentsfollowedsuit.77 EvenundertheBushAdministration,aTrea
suryspokespersonstated,Secretary[Henry]Paulsonhassaidthathedeploreswhatvulture
fundsaredoing,andthedepartmentfiledamicusbriefsinseveralsuitswherethefundscould
undermineIMFpolicy.78In2009,MaxineWaters(DCalifornia)introducedtheStopVulture
FundsAct,whichwouldbananyonefromsuingpoorcountriesinU.S.courtsformorethenthe
purchasepriceofthedebtplus6%ayearinterest.79
OnFebruary26,2010,theU.K.parliament
bannedvulturelawsuitsatthebehestoftheLiberiangovernment.80
Ifonebelievesthatacrediblesanctionregimewouldbedesirablefordevelopingcountries,then
thecurrentlegalframeworkneedstobeconsiderablytightened. Ontheotherhand,ifonebelievesthat
thevultureshaveoverallnegativeconsequences,thenourresultsimplythatthisfearismisplaced.
Thereisnoevidenceofarunforthecourthouse;noristhereevidencethatvulturingsystematically
increasestheperceivedriskofholdingLatinAmericansovereigndebt. Inshort,wesawacredibledebt
enforcementregimeintheearly20thcentury.81 Intheory,thefeaturesofthisregimeshouldberepli
cableintheearly21stusingalegalframeworkandwithoutrecoursetotheMarines. Therearefew
practicalreasonwhyvirtualblockadescannotbeaseffective(andlesscostly)thanrealones. In
practice,however,wehavenotreplicatedthisregime,andwithoutanexplicitpoliticaldecisiontodoso,
thereisnosignofsucharegimespontaneouslyemergingasaresultofjudicialaction.
76WorldBanktoIncreaseSupporttoCurbVultureFundActions,PressReleaseNo:2007/415/PREM,http://go.worldbank.org/J2FE06IQI0.
77
Press
release
of
the
Paris
Club
on
the
threats
posed
by
some
litigating
creditors
to
heavily
indebted
poor
countries,
May
22,
2007.
PR_Paris_Club_Lit___HIPCmay2007.PDF.78
http://thehill.com/leadingthenews/vulturefundstargeted20071101.html.79
AshleySeager,USbillwouldoutlawvulturefunds,TheGuardian,19June2009.Availableat
http://www.guardian.co.uk/business/2009/jun/19/usoutlawvulturefunds.80
BBCWorldNewsAmericaSpecialReport,BroadcastMarch,2,2010.Availableathttp://www.gregpalast.com/bbconthehuntforan
americanvultureattackingliberia,accessedonMarch31,2010.81
Moregenerally,thethreatoflitigationandattachmentorthelackoforderlydebtworkoutscouldbeanimportantincentivefordebtrepay
ment.AsDooley(2000)andRogoff(2003)note,ifprivatefinancialarrangementsdependonthethreatofcostlydefaultsandoutputlosses,
mechanismsthatallowforswiftresolutionsmayreduceinternationallending,becausesuchproposalsmightweakentheconfidenceofinterna
tionalinvestorsandtheincentivesthatmakeinternationaldebtpossible.Dooley,Michael.(2000).CanOutputLossesFollowingInternational
FinancialCrisesbeAvoided?NBERWorkingPaperW7531.
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Table1:SummaryofSpread(byCountry),19001929
Country Mean Std.Dev. Freq.
Argentina 1.59 0.98 352
Brazil 2.67 1.12 352
Chile 1.33 0.83 352
Colombia 0.10 2.85 352CostaRica 3.87 3.06 352
Cuba 0.89 0.79 292
ElSalvador 4.23 1.91 250
Guatemala 7.59 5.15 352
Honduras 6.39 3.69 352
Mexico 3.79 2.65 352
Nicaragua 3.28 1.11 352
Paraguay 5.30 4.34 352
Peru 1.68 0.55 203
Uruguay
1.73
1.16
352Venezuela 2.15 2.76 352
All 3.15 3.37 4969
Table2:TheEffectsoftheDeclarationoftheRooseveltCorollary,May1904,allLatinAmerica
Dependentvariable: Spread(Percent)
LatinCountries 1month 3months 6months 12months
Corollary 0.48 0.07 0.69 0.20
[0.30]
[0.11]
[0.31]**
[0.11]*
No.obs 4969 4969 4969 4969
Rsq 0.52 0.52 0.52 0.52
Countrydummies Y Y Y Y
Yeardummies Y Y Y Y
Robuststandarderrors,clusteredbycountry.*significantat10%;**signif.at5%;***
signif.at1%.Macrovariablesare: oneyearlaggedexportgrowth,oneyearlaggedCPI(%
annual)
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Table3:TheEffectoftheDeclarationoftheRooseveltCorollary,May1904,
AllLatinAmericancountries,pre,during,andpostDeclaration
Dependentvariable: Spread(Percent)
LatinCountries 1month 3months 6months 12months
Pre
Corollary
1.09
1.43
1.11
0.88
[0.50]** [0.65]** [0.58]* [0.44]*
Corollary 0.74 1.11 1.03 1.01
[0.41]* [0.57]* [0.58]* [0.58]
PostCorollary 0.45 0.44 0.06 0.15
[0.30] [0.26] [0.15] [0.20]
No.obs 4969 4969 4969 4969
Rsq 0.52 0.52 0.52 0.52
Country
dummies
Y
Y
Y
Y
Yeardummies Y Y Y Y
Robuststandarderrors,clusteredbycountry.*significantat10%;**signif.
at5%;***signif.at1%.
Table4:SelectedU.S.interventionsinLatinAmericancountries(19001929)
Date: Event:
February,1904 U.S.bombardDomRep.
September,
1906
U.S.
takes
control
of
Cuba
April,1907 U.S.marineslandinHonduras
June,1912 U.S.gunboatsdispatchedtoCuba
August,1912 U.S.marineslandinNicaragua
January,1914 U.S.beginperiodlandingsinHaititoprotectUSproperty
April,1914 U.S.occupiesVeracruz,Mexico
August,1915 U.S.marinesoccupyHaiti
May,1916 U.S.bombardsSantoDomingo,DomRep.
March,1917 U.S.marineslandinCubatoprotectU.S.propertyowners
August,1921
U.S.marinesinterveneontheborderbetweenPanama&
CostaRica
December,1926 U.S.marineslandinNicaragua
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27
Table5:Gunboats(SpilloverEffects)
Dependentvariable: Spread(1MonthWindow)
LatinCountries (1) (2)
Episode 0.15 0.14
[0.05]** [0.05]**
No.obs 4953 4953
Rsq 0.52 0.69
Countrydummies Y Y
Perioddummies Y Y
PeriodTrend*Country dummies N Y
Robuststandarderrors,clusteredbycountry.*significantat10%;**
signif.at5%;***signif.at1%
Table6:Gunboats,CaribbeanCountries(SpilloverEffects),Pre,During,andPostInvasion
Dependentvariable: Spread(1MonthWindow)
CaribbeanCountries (1) (2)
PreInvasion 0.006 0.001
[0.04] [0.05]
Invasion 0.13 0.13
[0.07]* [0.07]
PostInvasion 0.19 0.19
[0.08]** [0.08]**
No.obs 2982 2982
Rsq 0.53 0.73
Countrydummies Y Y
Perioddummies Y Y
PeriodTrend*Country dummies N Y
Robuststandarderrors,clusteredbycountry.*significant
at10%;**signif.at5%;***signif.at1%
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Table7:Gunboats,CaribbeanCountries(SpilloverEffects)
Dependentvariable: Spread
(1) (2)
T3 0.02 0.01
[0.02] [0.03]
T2 0.00 0.00
[0.02] [0.01]
T1 0.04 0.04
[0.04] [0.04]
T 0.008 0.02
[0.02] [0.02]
T+1 0.04 0.05
[0.02]* [0.02]**
T+2 0.05 0.06
[0.03]* [0.03]*
T+3 0.04 0.05
[0.02] [0.02]**
T+12 0.02 0.02
[0.02] [0.02]
No.obs 2639 2639
R
sq
0.51
0.8
Countrydummies Y Y
Perioddummies Y Y
PeriodTrend*Country dummies N Y
Robuststandarderrors,clusteredbycountry.*significantat10%;**signif.at5%;***signif.at1%
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Table8:
Case:Creditorvs.Debtor Casefiled
Summary
judgment
SUCCESSFULATTACHMENT:
Pravinvs.Peru 1Feb93 19Jan96
CBICvs.Brazil 29Jun94 16Mar96
Elliotvs.Panama 15Jul96 16May97
Elliotvs.Peru 8Oct96 29Sep00
Dartvs.Argentina 10Apr03 12Sep03
SETTLEMENT,NOATTACHMENT:
LNCInvestmentsvs.Nicaragua 21Aug96 2Apr99
GPHemispherevs.Nicaragua 22Jul97 30Oct98
Urbanvs.Argentina 20Nov02 9Mar06
Lightwatervs.Argentina 6May02 14Apr03
OldCastlevs.Argentina 6May02 14Apr03
MacrotecnicIntlCorpvs.Argentina 18Jun02 14Apr03
Fontanavs.Argentina 29Oct03 24May04
Latinburgvs.Argentina 29Oct03 24May04
NMLvs.Argentina 7Nov03 10May06
Sources: Courtbriefings(identifiedusingLexisNexisLegal),newspa
perarticles(throughFactiva),Singh(2003),andSturzeneggerandZet
telmeyer(2006).Note: mostoftheArgentinecases,saveDart,were
settled. Onlythefirstfivecasesresultedinattachments.
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Table9:Vulturing,LatinCountries(SpilloverEffects)
Dependentvariable: EMBI
Day 1week 2weeks 4weeks
PanelA
RegimeChange 0.73 1.28 1.26 1.15
[1.23] [0.92] [0.93] [0.99]
No.obs 24087 24082 24077 24067
R2 0.54 0.54 0.54 0.54
PanelB
AllAttachments 0.99 0.70 0.64 0.63
[0.60] [0.57] [0.38] [0.45]
No.obs 24085 24070 24055 24025
R2 0.54 0.53 0.53 0.53
PanelC
SuccessfulFilling 0.981 0.907 0.87 0.84
[0.57] [0.41]* [0.39]** [0.44]*
No.obs 24087 24082 24077 24067
R2 0.54 0.53 0.53 0.53
Robuststandarderrors,clusteredbycountry.significantat20%;*signif.at10%;**signif.at
5%;***signif.at1%.Resultsincludecountry,time,country*timedummies,.RegimeChange
referstotheattachmentofthePerucase;Allattachmentsreferstoallsuccessfulattachments;
Successfulfilingsreferstothefilingoflawsuitsthatresultinsuccessfulattachments.SeeTable
9foracompletelistofcases.
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Table10:Vultures,SuccessfulFilling,(SpilloverEffects)
WeeksBeforeandAftertheEvent
Dependentvariable: EMBI
LatinCountries EMBI(Percent)
T3 0.38
[0.37]
T2 0.27
[0.20]
T1 0.099
[0.13]
T 1.05
[0.55]*
T+1 0.56
[0.39]
T+2 0.49
[0.40]
T+3 0.38
[0.45]
T+4 0.53
[0.48]
No.obs 24087
R2 0.54
Robust
standard
errors,
clustered
by
country.
significant
at
20%;
*
signif.
at
10%;**
signif.
at
5%;***signif.at1%.Resultsincludecountry,time,country*timedummies,controls.
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Figure1: AverageMonthlySpreadsforAllCountries,CaribbeanCountries,BaselineCountries
(Argentina,BrazilandChile)andandInterventiondates
Figure2:AveragedailyEMBIforLatincountriesanddecisiondates
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
1900 1902 1904 1906 1908 1910 1912 1914 1916 1918 1920 1922 1924 1926 1928
Average Spread, ABC Countries
Average Spread, All Countries
Average Spread, Circum-Caribbean Countries
Spread (Percent)
Feb 1904
Sept 1906
April 1907
June 1912
Aug 1912
Jan 1914
Aug 1915
May 1916
Mar 1917
Aug 1921
Dec 1926
Average Daily Latin America EMBI-plus
0
5
10
15
20
25
12/31/1993 12/31/1994 12/31/1995 12/31/1996 12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006
Percent
6/29/94
1/16/96
3/16/96
7/15/96
5/16/97
10/8/96
9/29/00
4/10/03
9/12/03