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Lending to the Borrower from Hell: Debt and Default in the Age of Phillip II

  • Drelichman, Mauricio
  • Voth, Hans-Joachim

Philip 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 II’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 bankers’ coalition, and examine how it survived across the biggest defaults in Philip’s reign. In particular, we argue that the effectiveness of lending moratoria was sustained through a ‘cheat-the-cheater’ 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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File URL: http://mauricio.econ.ubc.ca/pdfs/borrowerfromhell.pdf
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Paper provided by Vancouver School of Economics in its series Economics working papers with number mauricio_drelichman-2008-8.

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Length: 37 pages
Date of creation: 07 Jul 2008
Date of revision: 06 Sep 2010
Handle: RePEc:ubc:bricol:mauricio_drelichman-2008-8
Contact details of provider: Web page: http://www.economics.ubc.ca/

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  1. Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Working papers 8813, Wisconsin Madison - Social Systems.
  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.
  3. Kenneth M. Kletzer & Brian D. Wright, 2000. "Sovereign Debt as Intertemporal Barter," International Finance 0003004, EconWPA.
  4. Drelichman, Mauricio & Voth, Hans-Joachim, 2010. "The Sustainable Debts of Philip II: A Reconstruction of Castile's Fiscal Position, 1566–1596," The Journal of Economic History, Cambridge University Press, vol. 70(04), pages 813-842, December.
  5. Andrew Atkeson, 2010. "International lending with moral hazard and risk of repudiation," Levine's Working Paper Archive 200, David K. Levine.
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  8. 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.
  9. 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.
  10. Andrew K. Rose, 2002. "One Reason Countries Pay their Debts: Renegotiation and International Trade," EUI-RSCAS Working Papers 18, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  11. Flandreau, Marc & Jobst, Clemens, 2005. "The Ties that Divide: A Network Analysis of the International Monetary System, 1890 1910," The Journal of Economic History, Cambridge University Press, vol. 65(04), pages 977-1007, December.
  12. 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.
  13. 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.
  14. Roland Bénabou, 2009. "Groupthink: Collective Delusions in Organizations and Markets," NBER Working Papers 14764, National Bureau of Economic Research, Inc.
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  18. Bulow, Jeremy & Rogoff, Kenneth S., 1989. "A Constant Recontracting Model of Sovereign Debt," Scholarly Articles 12491028, Harvard University Department of Economics.
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  22. Raquel Fernandez & Robert W. Rosenthal, 1990. "Strategic Models of Sovereign-Debt Renegotiations," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 331-349.
  23. Drelichman, Mauricio, 2005. "The curse of Moctezuma: American silver and the Dutch disease," Explorations in Economic History, Elsevier, vol. 42(3), pages 349-380, July.
  24. 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.
  25. Natalia Kovrijnykh & Balázs Szentes, 2007. "Equilibrium Default Cycles," Journal of Political Economy, University of Chicago Press, vol. 115, pages 403-446.
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  27. Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
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