World War 1 War Debts 1925
EFFECT OF WAR-DEBT FUNDING ON FOREIGN BONDS
FRANCE, Belgium, and other European countries have recently been funding their floating war debts to the United States Government. It happens that these countries have also floated a number of government bond issues in the United States, and the bonds have been sold to American investors and are being actively dealt in on the Stock Exchange. And more. bond issues are in prospect. Now comes the question, what will be the effect of the funding of the war debts upon the investment rating of the bonds of the nations concerned? This question, says Mr. George T. Hughes, in one of his Consolidated Press investment articles, is now a matter of great interest to the investing public, and he therefore thinks it proper to state his views briefly as follows:
The first reaction of the investor to the announcement that a foreign Government has recognized an obligation of this character and has agreed upon terms of payment is highly favorable. The credit of the Government concerned is at once raised. Private citizens are more ready to make new loans once they know that these older debts have been cared for. And in a measure there is justification for this, but it is not the only factor in the problem.
Whether or not a foreign government bond is a good investment depends upon two considerations, one the willingness of the creditor to pay, and the other ability to pay. Now the good faith of a foreign Power in recognizing its war-time obligations to the American Government, and in agreeing to make payments thereon, indicates its willingness to take a similar course with regard to other debts, but it does not increase its ability to take care of these other debts. That is a subject to which just as much if not more attention should be given by the individual who proposes to buy foreign government bonds as before.
Even tho payments on these war-time debts are spread out over a half-century, and even tho the interest rate is very low, it adds that much to the outgo, and by that much makes more difficult a balanced budget. This ought to be self-evident, but there is grave danger of being overlooked just now. Nothing is more certain than that the United States through private investors will be called upon for a long time to come to finance the needs of many foreign Governments. Many opportunities along this line will be at once safe and profitable, but many others will carry a good deal of risk which should be carefully appraised in all its aspects if the investment is not to be regretted.
Source: The Literary Digest for October 10, 1925
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