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This introductory chapter provides an overview of Brazil's early experience with sovereign borrowing and its relation to financial underdevelopment. It summarizes four topics that intersect with Brazil's experience: how new states create and sustain sovereign borrowing; access to an ever-increasing amount of long-term domestic capital; the way in which Brazilian creditworthiness came undone sixty-five years after the first London loan in 1824; and the relationships between creditworthiness and capital markets. The focus is on Imperial Brazil (1822–89), as this book addresses how the government could successfully commit to borrow without default, yet fail to achieve financial development of the type that would support sustained economic growth. Despite its success in establishing sovereign creditworthiness, Imperial Brazil was a remarkable failure in achieving the broader financial development required for modern economic growth. No revolution in private finance transpired despite the government's faithful servicing of its debt obligations over the decades and the creation of a vibrant domestic market in government securities.

This chapter presents a model of the political economics of sovereign borrowing. It establishes the conditions under which a ruler will seek to borrow and capitalists will agree to lend, despite having no access to third-party enforcement of the debt contract. The model corresponds to fundamental features of the political institutions that governed fiscal practice in Imperial Brazil. The chapter highlights how particular institutional arrangements permit higher levels of borrowing at lower cost—stylized conditions that correspond remarkably well to the Imperial state's own institutions and to its own experience in the capital markets. The most visible of these institutions was the division of fiscal authority between the executive and the legislative branch defined by the Constitution of 1824. The chapter also establishes the contours of Brazil's public finances from independence in 1822 to the fall of the constitutional monarchy in 1889. It tests the hypothesis that the Empire's fiscal policy had been sustainable.

This chapter focuses on Brazil's domestic borrowing. The hypothesis that the Empire was excessively reliant on foreign lending is rejected. For much of the Imperial era the bulk of Brazil's debt was domestic in origin. The volume of domestic borrowing increased more rapidly than the foreign debt, and the cost of new domestic borrowing fell dramatically, especially from the early 1830s to the 1850s. This chapter first establishes the contribution of domestic sources of public finance and outlines the structure of the government's domestic obligations. It then examines government borrowing via apólices, as well as the three large National Loans, i.e. in 1868, 1879, and 1889. It also describes the contours of the primary market for lending, identifying the chief characteristics of the state's lenders, and establishes the government's record as a credible borrower by reference to the increasing volume of borrowing. The chapter concludes by addressing some of the implications of Brazil's experience for the scholars' general understanding of sovereign borrowing.

This chapter illustrates that borrowing patterns differ significantly across developing countries, even if they have the same credit rating, income level, and degree of democracy. Some rely on private creditors, others on multilateral institutions; some use loans from Western governments like the United States, while others borrow from emerging creditor governments such as China. These empirical patterns suggest that it is not only creditors who determine loan allocations, but that recipient governments have preferences and act upon them. This book argues that governments choose their creditors to satisfy the demands by the dominant societal interest groups. These groups prefer one type of creditor to others because the conditions attached to the monetary transfers imply positive (or negative) distributional consequences for the groups. The chapter concludes with a preview of the qualitative and quantitative evidence presented later in the book.

The end of the First World War marked a turning point in the practices of sovereign borrowing. The League of Nations loan for Austria issued in 1923 precluded foreign creditor control of Austrian assets and policies. Instead, financial control and oversight were placed in the hands of the League of Nations Council and the technocrats advising it. International negotiation and collaboration in Geneva preempted Austria’s neighbour countries from turning economic reconstruction into a tool of their particularistic foreign policy interests. Neither foreign bondholders nor guarantor governments were granted direct oversight over Austrian policies. In order to keep emergency borrowing by bankrupt states free from the machinations of international power struggles and coveted spheres of interest, the World Bank and International Monetary Fund continued the practice of multilateral oversight and control following the Second World War.