Lending to the Borrower from Hell: Debt and Default in the Age of Phillip II
AbstractPhilip II of Spain accumulated debts of over 50% of GDP. He also failed to honor them four times. We ask what allowed the sovereign to borrow much while defaulting often. Earlier work emphasized either banker irrationality or the importance of sanctions, in line with Bulow and Rogoff (1989). Using a unique dataset on 438 lending contracts derived from the archives, we show that neither interpretation is supported by the evidence. What sustained lending was the ability of bankers to cut off Philip IIâ€™s access to smoothing services. Lenders contracted with the king in overlapping syndicates, effectively creating a network of bankers. We analyze the incentive structure that supported the cohesion of this bankersâ€™ coalition, and examine how it survived across the biggest defaults in Philipâ€™s reign. In particular, we argue that the effectiveness of lending moratoria was sustained through a â€˜cheat-the-cheaterâ€™ mechanism, in the spirit of Kletzer and Wright (2000). Since the king needed to smooth his expenditure in the face of major revenue and spending shocks, the ability of bankers to cut him off from funding was sufficient to sustain cross-border lending.
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Bibliographic InfoPaper provided by UBC Department of Economics in its series UBC Departmental Archives with number mauricio_drelichman-2008-8.
Length: 37 pages
Date of creation: 07 Jul 2008
Date of revision: 06 Sep 2010
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sovereign debt; default; lending coalitions; sanctions; reputation;
Other versions of this item:
- Mauricio Drelichman & Hans‐Joachim Voth, 2011. "Lending to the Borrower from Hell: Debt and Default in the Age of Philip II," Economic Journal, Royal Economic Society, vol. 121(557), pages 1205-1227, December.
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
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- Drelichman, Mauricio & Voth, Hans-Joachim, 2011.
"Serial defaults, serial profits: Returns to sovereign lending in Habsburg Spain, 1566-1600,"
Explorations in Economic History,
Elsevier, vol. 48(1), pages 1-19, January.
- Drelichman, Mauricio & Voth, Hans-Joachim, 2010. "Serial Defaults, Serial Profits: Returns to Sovereign Lending in Habsburg Spain, 1566-1600," UBC Departmental Archives mauricio_drelichman-2010-, UBC Department of Economics, revised 04 Jul 2011.
- Mauricio Drelichman & Joachim Voth, 2011. "Serial defaults, serial profits: Returns to sovereign lending in Habsburg Spain, 1566-1600," Economics Working Papers 1262, Department of Economics and Business, Universitat Pompeu Fabra.
- Vesperoni , Alberto, 2013. "War Finance and the Modern State," NEPS Working Papers 6/2013, Network of European Peace Scientists.
- Asiento in Wikipedia (English)
- Asiento in Wikipedia (Finnish)
- Asiento in Wikipedia (Turkish)
- Economic Logic blog
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