The financial penalty for "unfair" debt: The case of Cuban bonds at the time of independence

Unfair sovereign debts, used, for instance, to suppress a rebellion, may be declared odious and not be repaid once the former regime is overthrown. Bondholders may therefore require a premium to compensate for the higher default risk due to the potentially odious character of these debts. On the basis of an original database of Cuban bonds, the paper shows the existence of a risk premium of at least 200 basis points which penalized bonds issued by the Spanish occupation regime. Bond market reactions to events changing the perception that the debts were unfair or that they would be repudiated are analysed on the basis of a structural VAR. © 2013 European Historical Economics Society.