Bonds without Borders: A History of the Eurobond Market

CHAPTER 1 Before the Beginning To 1962

The origins of bond markets can be traced back to governments and their need to borrow, particularly in times of war. In the late Middle Ages, the Republic of Venice was involved in recurring conflicts with neighbouring states. The authorities, concerned about the strains on the state treasury, took to drawing forced loans from their citizens in proportion to their wealth. Such debt paid 5% interest per year and had an indefinite maturity date. Initially regarded with some suspicion, they came to be seen as valuable investments that could be bought and sold. The bond market had begun.

From the medieval Italian city states to warring European powers looking to finance military campaigns, the issuance of interest-bearing debt has enabled them to pursue their ambitions. Much of this debt, like that of Venice, was undated with governments creating a permanent funded debt burden. The amount of debt that could be issued depended on the investor's confidence in the ability and commitment of the issuer to make the required payments under the contract. Unfortunately sovereign issuers were prone to renege on their debts or change the terms substantially, so the investor's preference was originally for short-dated, high interest loans.

During the latter part of the 16th century the Dutch attained an increasingly dominant position in international trade, especially the lucrative spice trade, a position previously occupied by the Portuguese and Spaniards. ...