International Lending in War and Peace, 1790-2020

Abstarct: We show that private international capital flows collapse in times of war and disaster, while the opposite is true for official (government-to-government) lending. These official capital flows are much larger than previously known, as evidenced by our new dataset on the near universe of state lending transactions worldwide since 1790, with more than 1.8 million cross-border loans, grants and guarantees issues by foreign governments and multilateral organizations. Sovereign lending is markedly countercyclical, with pronounced surges in lending during major crises such as WW1, WW2 or the 2008 crash. In contrast, private lending flows reverse during crises, showing strong pro-cyclicality. Throughout modern history, it has been government lending that has helped to avert financial collapse or military defeat, while private markets have not been a reliable source of funding during emergencies. In case of future geopolitical and financial turmoil, one can expect state-led capital flows to take over the leading role in the international financial system.