shadowing the latin monetary union: interest rates and debts …0473c22d-3bf1-4a51-ab9a... ·...

Shadowing the Latin Monetary Union:Interest rates and Debts Dynamics

at the Balkans Periphery

Nikolay NENOVSKY

Jacques-Marie VASLIN

CRIISEA, University of Picardie, France

10th Conference of the SEEMHN

1-2 October 2015, VIENNA

Motivations

� Reasons for the European periphery to join a monetary regime of the core countries/ is this bearable at the long run…

� Monetary regime/Interest rate and debt dynamics/Economic development – question of their compatibility

� Parallels with the current European situation

� Current crisis and Eurozone architecture

� Euro perspectives for the Balkans countries

Inspirations

� Balkans monetary and financial history is understudied quantitatively andalmost never modelled …

� We have been inspired by research and ideas: on debt (Rogoff,Reinhart(s); Obstfeld and Taylor (2003); P. Mauro and company (2002);Homer and Sylla’s book (1996); Della Paolera and Taylor on Latin America(2012)…; on monetary regimes and macro economy (de Cecco, M. Bordo,M. Flandreau, B. Eichengreen, H. James, L. Einaudi, K. Mitchener, M.Morys, to name a few …)

� And obviously by the researchers from the region: D. Gnjatovic, M. Ivanov,D. Vachkov, K. Dimitrova…, and from that period (M. Nedeljkovic, V.Slavescu, N. Stoyanov, etc..)…

Theoretical problems

Incompatibilities hypothesis � Instable and self destructing and desequilibrating internal dynamics

� Phase 1 (infrastructure driven government): Economic development/no saving, need for foreign capital/Gold Standard/signaling for lowering the cost of capital and risk premium

� Phase 2 (nonproductive loans): Monetary supply in (de facto) silver (Russian silver coins), Agriculture, net outflows of gold, high agio, fiscal burden, either domestic debt, or mainly new foreign debts to reimburse old one etc., over-borrowing dynamics ….

Monetary Flows

Center

(LMU)Periphery Silver

Gold

silver

Gold Inflows to periphery

(export, loans)

Gold outflows from periphery

(imports, interest settlement

Database

Database

�Sources

�SEEMHN

�Others sources/National Banks

�Cours authentiques (Bourse de Paris) up to 1892

�Bulletin de la cote from 1893

(This reviews are available on the website gallica.bnf.fr)

Database

• Monthly prices of bonds in the Paris Stock exchange from 1875 to 1914

• Bulgarian 5% bond from 1897 to 1914

• Hungarian 6% bond from 1877 to 1884, and 4% to 1914

• Romanian 5% bond from 1875 to 1888, and 4% to 1914

• Serbian 5% bond from 1882 to 1896, and 4% to 1914

• Free risk rate: French 3% consol from 1875 to 1914

Interest Rate Calculation

� The prices of the bonds quoted in the Paris stock exchange are dirty price (Bdp), ie with the accrued coupon (ac)

� If we want to approximate the interest rate (��) we must obtain the clean price (Bcp)

� �� = �� × � ��

�� = �� − ��

� �� = � !" #$�"

0

100

200

300

400

500

600

700

800

900

1000

1875 1880 1885 1890 1895 1900 1905 1910

Hungary Romania Serbia Bulgaria

Hungary

Redemption in 1884

6% to 4%

Romania

Redemption in 1894

5% to 4%

Serbia

Redemption in 1896

5% to 4%

War against Ottoman Empire

Testing interest rates and spread dynamics (monthly data)

(cointegration and β convergence)

Countries Cointegration matrix (interest rates) Number of Cointegration vectors at 0.05 level Period: (1882-1912), for Bulgaria (1897-1912)/Monthly (360 obs.)

France Hungary Romania Serbia Bulgaria

France *

Hungary 2 *

Romania 0 2 *

Serbia 0 0 0 *

Bulgaria 0 0 0 0 *

Countries Cointegration matrix (interest rates)Number of Cointegration vectors at 0.05 level Period: (1904-1912)/Monthly (96 obs)

France Hungary Romania Serbia Bulgaria

France *

Hungary 1 *

Romania 1 1 *

Serbia 0 0 1 *

Bulgaria 0 0

(1 at level of 0.10)

1 1 *

Empirical tests on β-convergence (spreads)

d &�' = ( + *&�'�+ +,-�(&�'�/) + 0'

where &� = spread of Hungary, Serbia, Romania, Bulgaria

French interest rate/benchmark

Convergence if β < 0

β is the speed of conference

β Convergence(parameter β, p stat in the brackets)


1882-1912

(360 obs)

- 0.04

(0.0086)

- 0.03

(0.3876)

- 0.02

(0.1699)

- 0.01

(0.5994)

1904-1912

(96 obs)

- 0.07

(0.0017)

- 0.15

(0.0228)

- 0.003

(0.2974)

- 0.019

(0.2799)

• Source: Flandreau (2004)

� In 1906, Paul Leroy-Beaulieu:

“A number of government bonds in general must be currently ranked among the speculative securities: Serbian, Bulgarian…”

Case Study: Serbia

Serbia (1880 – 1912): basic monetary and debt chronology

� Two periods

� 1880 – 1903

- budget deficit, unproductive loans (1887-1906) with different collateral, silver dominance (foreign silver currencies), agio, etc.

- cost of borrowing, Interest rates (5%, effective 6.5%)

� 1904 – 1912

- budget surplus, more productive loans, more gold, lower agio,

- cost of borrowing, Interest rates (4.5%, effective 5.7%)


� Monetary and debt facts � 1873/1878 – LMU (1:15,5), in fact silver standard, agio

� 1884 – Central Bank

� 1885 – unsuccessful action with gold banknotes (later 95% silver…)

� 1894/95 crisis, almost default (40% foreign debt service),

- debt conversion and consolidation (form 5% to 4% loan)

� 1903 - King Alexander I Obrenović killed, - new dynasty, King Peter Karadjordjević

� 1903/04 – Nikola Pašić/ Lazar Paču, conservative public finance, gold standard adherent

� Tensions with Austria-Hungary, custom wars etc…, closer to France and Russia

Stabilising public finance 1903/1904 Nikola Pašić (1845-1926) and Lazar Paču (1855-1915)


� Sources

� SEEMNH book and data

� NB of Serbia (1934/data, 2004)

� Gnjatovic, D. (different publications, 1991 book in Serbian)

� Nedeljkovic, M. (1909)

� Bochkovitch (1919)

� Many Bulgarian sources from that time

0

100

200

300

400

500

600

700

800

900

1000

1875 1880 1885 1890 1895 1900 1905 1910

SerbieRedemption

In 1896

The coupon falled from

5% to 4%

Coup d’Etat in

1903

Austria annexed

Bosnia-Herzegovina

1908

Bankruptcy

1893

Serbia: agio, interest rate, spreads (annual data 1882 – 1912)

.00

.02

.04

.06

.08

0

4

8

12

16

20

1875 1880 1885 1890 1895 1900 1905 1910

interest rateagio spread

0

4

8

12

16

20

-30,000

-20,000

-10,000

0

10,000

20,000

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

agio_end of the year (ls)budget deficit/surplus (rs)

1894/95 crisis

and conversion

1903/04/ L.Pacu

new finance policy

Serbia: agio and public finance(annual data 1882 – 1912)

0

4

8

12

16

200

2,500

5,000

7,500

10,000

12,500

15,000

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

agio_end of the year (ls)banknote_gold (rs)

1908 crisis

custom war

with Austria

Serbia: agio and gold banknotes(annual data 1882 – 1912)

Concluding remarks/our contributions

� Theoretically:

� Analysis internal self destructing macroeconomic and monetary dynamics of Balkans economies (ex: Serbia) when shadowing a hard monetary regime…

� Heterogeneity and variation of intera rate convergence …

� Role of the agio as basic indicators in the case of Serbia etc.

� Empirically:

� Construction of interest rates series for 4 countries sovereign bonds

� Tests for cointegration and convergence

Perspectives

� Explaining the spread

- traditional factors, institutional, wars, empire (soft power), political economy, agio…

� Panel model, eventually others countries

� Calculate interest rate with actuarial method

� …. Bulgaria (small liquidity of the Bulgarian bond, ex. no quotes in January 1902), …

Variable Augmented Dickey-

Fuller Test

McKinnon critical values (ADF)* Order of Integration

and lags

Level First

difference

1 % 5 % 10 % Integration Lags

if -1.75 -16.08 -3.45 -2.87 -2.57 I(1) 2

ih -2.74 -20.96 -3.45 -2.87 -2.57 I(1) 1

ir -2.09 -20.39 -3.45 -2.87 -2.57 I(1) 1

is -2.06 -15.59 -3.45 -2.87 -2.57 I(1) 1

ib -0.70 -14.43 -3.46 -2.88 -2.58 I(1) 1

* Critical values based on the presence of a constant without trend. France, Hungary, Romania and

Serbia (1882-1912), Bulgaria (1897-1912).

Unit Root Tests

Empirical tests

log �� = (4 + (+ log �5 + 0

where �� = Hungary, Serbia, Romania, Bulgaria

and �5 is French interest rate/benchmark

� We are looking for the sign of (4 �� (+

Interest rate

of


1882-

1912

1903-

1912

1882-

1912

1903-

1912

1882-

1912

1903-

1912

1897-

1912

1903-

1912

Constant -1.26

(-4.07)

-2.15

(-4.63)

-1.63

(-4.21)

-0.99

(-1.46)*

-0.45

(-0.69)*

0.88

(0.73)*

-3.83

(-6.01)

-3.67

(-5.08)

French

interest rate

0.55

(6.15)

0.29

(2.27)

0.41

(3.66)

0.61

(3.14)

0.71

(3.73)

1.14

(3.22)

-0.25

(-1.38)*

-0.20

(-0.95)*

AR(1) 0.96

(85.67)

0.90

(25.88)

0.96

(71.99)

0.87

(19.63)

0.97

(82.05)

0.94

(27.08)

0.99

(84.05)

0.97

(50.24)

R2 adjusted 0.98 0.88 0.96 0.73 0.94 0.82 0.97 0.96

DW 2.35 2.34 2.13 1.77 2.10 2.26 2.09 2.12

Obs adjusted 360 116 360 116 360 116 178 116

t- statistic in brackets, all parameters are significant at 1% confidence,

except noted with * - non significant even at 10%

shadowing the latin monetary union: interest rates and debts …0473c22d-3bf1-4a51-ab9a... ·...

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