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Serial defaults, serial profits: Returns to sovereign lending in Habsburg Spain, 1566-1600

  • Drelichman, Mauricio
  • Voth, Hans-Joachim

Philip II of Spain accumulated debts equivalent to 60% of GDP. He also defaulted four times on his short-term loans, thus becoming the first serial defaulter in history. Contrary to a common view in the literature, we show that lending to the king was profitable even under worst-case scenario assumptions. Lenders maintained long-term relationships with the crown. Losses sustained during defaults were more than compensated by profits in normal times. Defaults were not catastrophic events. In effect, short-term lending acted as an insurance mechanism, allowing the king to reduce his payments in harsh times in exchange for paying a premium in tranquil periods.

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Article provided by Elsevier in its journal Explorations in Economic History.

Volume (Year): 48 (2011)
Issue (Month): 1 (January)
Pages: 1-19

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Handle: RePEc:eee:exehis:v:48:y:2011:i:1:p:1-19
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