, 10 tweets, 6 min read Read on Twitter
Thinking of issuing or buying government debt indexed to the state of the economy? Here is a thread on some state-contingent debt horror stories, based on a new database I have been working on. Will add more (eventually) 1/
1863: Confederate States 20yr bonds convertible to warrants for cotton at 6 pence/pound, much lower than market prices. Great deal for investors, except logistical nightmares including running the Union maritime blockade (some investors do, Liverpool Mercury, 24/04/1864, p.10) 2/
The Pinay bonds in France (no relation): 1952 60-year bond linked to gold (oops!) and a 1955 bond linked to industrial production (fantastic innovation, a proto GDP-linked bond!). Large payments on the Pinay Gold Bond following the end of Bretton Woods. But there is more. 3/
Just before the surge in gold prices, in 73 the French government issued the famous Giscards, best described in The Bonfire of the Vanities (although it was 6.5b fr). "The Giscard! The Giscard..."15 years later reedemed 10x the amount issued (Prices rose 2.5x times). A ruin! 4/
Seems like an obviously bad idea to link debt to something that is not related to the state of the economy. Any gold-linked bonds today? Yes: India since 2015 (icicibank.com/Personal-Banki…) and Turkey since 2018 (altin.hazine.gov.tr) 🤷‍♂️ 5/5
*directly related to the overall state of the economy.
Addendum on French bonds that were not horror stories. The 1956 (not 1955) "Bons d'équipement industriel et agricole" was the 1st output linked bond I could find. Design details and one payment calculation for June 1967 attached (in french). Seems it worked fine @samlangfield 1/
The indexation mechanism was base interest 5% per annum plus 0.05% for every point industrial production index exceeds 1955 level. IP index was 236 by 1966 vs. 119 for 1955. 2/2
Also two bonds indexed to securities (1956, no primary source yet) and stock market index (1957, attached). The 1957 Ramadier loan was very large, 320b fr corresponding to 1/3 of CAC 40 capitalization. State-owned companies too issued state-contingent bonds (attached)
The 1950s in France saw fantastic innovations in government borrowing! Did the gold bond failures kill the more interesting Industrial Production and Stock market indexed bonds? Next time, Mexico’s 1977 #Petrobonos fiasco. Topical again thanks to #PEMEX and #PDVSA.
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