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Risk Sharing with the Monarch: Excusable Defaults and Contingent Debt in the Age of Philip II, 1556-1598

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  • Mauricio Drelichman
  • Hans-Joachim Voth

Abstract

Contingent sovereign debt can create important welfare gains. Nonetheless, there is almost no issuance today. Using hand-collected archival data, we examine the first known case of large-scale use of state-contingent sovereign debt in history. Philip II of Spain entered into hundreds of contracts whose value and due date depended on verifiable, exogenous events such as the arrival of silver fleets. We show that this allowed for effective risk-sharing between the king and his bankers. The data also strongly suggest that the defaults that occurred were excusable – they were simply contingencies over which Crown and bankers had not contracted previously.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 578.

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Date of creation: Jun 2012
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Handle: RePEc:bge:wpaper:578

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Keywords: sovereign debt; syndication; diversification; risk transfer; Spain;

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  1. Pezzolo, Luciano & Tattara, Giuseppe, 2008. "“Una fiera senza luogo”: Was Bisenzone an International Capital Market in Sixteenth-Century Italy?," The Journal of Economic History, Cambridge University Press, vol. 68(04), pages 1098-1122, December.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
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Cited by:
  1. Drelichman, Mauricio & Voth, Hans-Joachim, 2010. "Serial Defaults, Serial Profits: Returns to Sovereign Lending in Habsburg Spain, 1566-1600," Economics working papers mauricio_drelichman-2010-, Vancouver School of Economics, revised 04 Jul 2011.
  2. Irigoin, A & Grafe, R, 2012. "Bounded Leviathan: or why North & Weingast are only right on the right half," MPRA Paper 39722, University Library of Munich, Germany.

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