Contesting the preferred creditor status of the League of Nations, 1931–3^†

Abstract

Contesting the preferred creditor status of the League of Nations, 1931-3 † By JUAN FLORES ZENDEJAS *This article analyses the defaults of the League loans, which were private loans promoted by the League of Nations to support governments in central and eastern Europe in the 1920s. Previous works have argued that governments refused to grant these loans preferred status. However, this article shows that at the onset of the crisis, investors and governments treated these loans differently. It provides an empirical analysis to test whether there was a common element in the pricing of these loans and whether they enjoyed seniority compared to other, non-League loans. The findings show that there was a common factor driving the bond prices of these loans at the onset of the 1931 banking crisis. This article demonstrates that while these loans were not legally senior, certain governments granted the League loans de facto preferred status under the assumption that averting default would foster renewed support from the League. Archival evidence is provided to show that governments ceased to grant the League loans exceptional treatment when the expected support from the League did not materialize, which further weakened the ability of the League to secure emergency lending.

Review of periodical literature for 2021

“…In countless ways, the catastrophe of the First World War influenced both economy and society during the interwar era, and several articles published in 2021 addressed various aspects of the war's legacy. Flores Zendejas evaluates investors’ treatment of so‐called League loans: private loans promoted by the League of Nations on behalf of central and eastern European governments that had previously been excluded from international capital markets in the aftermath of the war. During the 1931 financial crisis (but not before), these loans exhibited lower risk premia than did non‐League loans; although the League loans did not bear a legally senior status, creditors were pricing the loans as though they did.…”