Foreign Debt and Secondary Markets: The Case of Interwar Germany

We offer a new interpretation of the sovereign and commercial debt repatriation to Germany that occurred between 1931 and 1938, involving German bonds held abroad. These bonds exhibited a non-negligible and varying spread between their domestic prices and their respective prices abroad. We analyze nine years of weekly prices of these securities on domestic and foreign stock markets to argue that the crucial factor for the origination, variation and persistence of the spread was the impact of capital controls on the possibility of trading on secondary markets. We also find that German authorities kept the practice of debt repatriation under increasingly strict control in order to enjoy some of its political benefits, while avoiding detrimental macroeconomic effects. Our conclusions differ from previous literature and in addition provide a comprehensive interpretation of different aspects of the episode, consistently with recent macroeconomic literature that links the efficiency of secondary markets to sovereign risk