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Lending to the borrower from hell: Debt and default in the age of Philip II, 1556-1598

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  • Mauricio Drelichman
  • Joachim Voth

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Abstract

What sustained borrowing without third-party enforcement, in the early days of sovereign lending? Philip II of Spain accumulated towering debts while stopping all payments to his lenders four times. How could the sovereign borrow much and default often? We argue that bankers’ ability to cut off Philip II’s access to smoothing services was key. A form of syndicated lending created cohesion among his Genoese bankers. As a result, lending moratoria were sustained through a ‘cheat the cheater’ mechanism (Kletzer and Wright, 2000). Our paper thus lends empirical support to a recent literature emphasizing the role of bankers’ incentives for continued sovereign borrowing.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1164.

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Date of creation: Dec 2007
Date of revision: Nov 2009
Handle: RePEc:upf:upfgen:1164

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Web page: http://www.econ.upf.edu/

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Keywords: Early modern state finances; incentive compatability; Philip II; serial default; sovereign debt; state capacity;

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  1. Rose, Andrew K., 2005. "One reason countries pay their debts: renegotiation and international trade," Journal of Development Economics, Elsevier, Elsevier, vol. 77(1), pages 189-206, June.
  2. Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, Econometric Society, vol. 59(4), pages 1069-89, July.
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  7. Natalia Kovrijnykh & Balázs Szentes, 2007. "Equilibrium Default Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 115, pages 403-446.
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Cited by:
  1. Dhillon Amrita, & García-Fronti Javier & Zhang Lei, 2009. "Sovereign Debt Default : The Impact of Creditor Composition," The Warwick Economics Research Paper Series (TWERPS) 901, University of Warwick, Department of Economics.
  2. Yves Balasko & Enrique Kawamura, 2010. "Pareto-Improving Defaul," Working Papers, Universidad de San Andres, Departamento de Economia 102, Universidad de San Andres, Departamento de Economia, revised May 2010.

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