Sovereign debt guarantees and default: Lessons from the UK and Ireland, 1920-1938

We study the daily yields on Irish land bonds listed on the Dublin Stock Exchange during the years 1920-1938. We exploit Irish events during the period and structural differences in land bonds to tease out a measure of investors' credibility in a UK sovereign guarantee. Using Ireland's default on intergovernmental payments in 1932, we find a premium of about 43 basis points associated with uncertainty about the UK government guarantee. We discuss the economic and political forces behind the Irish and UK governments' decisions pertaining to the default. Our finding has implications for modern-day proposals to issue jointly-guaranteed sovereign debt.'Further, in view of all the historical circumstances, it is not equitable that the Irish people should be obliged to pay away these moneys' - Eamon De Valera, 12 October 1932.