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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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Author Info
Mauricio Drelichman
Joachim Voth ()

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Abstract

Philip II of Spain accumulated debts equivalent to 60% 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. Using new archival data, we show that neither interpretation is supported by the evidence. What sustained lending was the ability of bankers to cut off Philip II’s access to smoothing services. We analyze the incentive structure that supported the cohesion of this bankers’ coalition. Lending moratoria were sustained through a “cheat the cheater” mechanism (Kletzer and Wright, 2000).

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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: Dec 2008
Handle: RePEc:upf:upfgen:1164

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

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

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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  1. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Blackwell Publishing, vol. 48(2), pages 289-309, April. [Downloadable!] (restricted)
  2. Rui Pedro Esteves, 2007. "Quis custodiet quem? Sovereign Debt and Bondholders' Protection Before 1914," Economics Series Working Papers 323, University of Oxford, Department of Economics. [Downloadable!]
  3. Cole, Harold L. & Kehoe, Patrick J., 1995. "The role of institutions in reputation models of sovereign debt," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 45-64, February. [Downloadable!] (restricted)
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  4. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June. [Downloadable!] (restricted)
  5. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-97, December. [Downloadable!] (restricted)
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  6. Daron Acemoglu & Simon Johnson & James Robinson, 2005. "The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth," American Economic Review, American Economic Association, vol. 95(3), pages 546-579, June. [Downloadable!]
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  7. Kris James Mitchener & Marc D. Weidenmier, 2005. "Supersanctions and Sovereign Debt Repayment," NBER Working Papers 11472, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Papers 13882, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. James Conklin, 1998. "The Theory of Sovereign Debt and Spain under Philip II," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 483-513, June. [Downloadable!] (restricted)
  10. Flandreau, Marc & Jobst, Clemens, 2005. "The Ties that Divide. A Network Analysis of the International Monetary System," CEPR Discussion Papers 5129, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February. [Downloadable!] (restricted)
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  12. Natalia Kovrijnykh & Balázs Szentes, 2007. "Equilibrium Default Cycles," Journal of Political Economy, University of Chicago Press, vol. 115, pages 403-446. [Downloadable!] (restricted)
  13. Lvarez-Nogal, Carlos & Prados De La Escosura, Leandro, 2007. "The decline of Spain (1500 1850): conjectural estimates," European Review of Economic History, Cambridge University Press, vol. 11(03), pages 319-366, December. [Downloadable!]
  14. Fernandez, Raquel & Rosenthal, Robert W, 1990. "Strategic Models of Sovereign-Debt Renegotiations," Review of Economic Studies, Blackwell Publishing, vol. 57(3), pages 331-49, July. [Downloadable!] (restricted)
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