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

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  • Drelichman, Mauricio
  • Voth, Hans-Joachim

Abstract

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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  • Drelichman, Mauricio & Voth, Hans-Joachim, 2008. "Lending to the Borrower from Hell: Debt and Default in the Age of Phillip II," Economics working papers mauricio_drelichman-2008-, Vancouver School of Economics, revised 06 Sep 2010.
  • Handle: RePEc:ubc:bricol:mauricio_drelichman-2008-8
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Lending to the borrower from hell
      by Economic Logician in Economic Logic on 2009-01-09 00:04:00

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    Cited by:

    1. Péter Benczúr & Cosmin L. Ilut, 2016. "Evidence for Relational Contracts in Sovereign Bank Lending," Journal of the European Economic Association, European Economic Association, vol. 14(2), pages 375-404.
    2. Mauricio Drelichman & Hans-Joachim Voth, 2016. "Duplication without constraints: Álvarez-Nogal and Chamley's analysis of debt policy under Philip II," Economic History Review, Economic History Society, vol. 69(3), pages 999-1006, August.
    3. Michael D. Bordo & Christopher M. Meissner, 2015. "Growing Up to Stability? Financial Globalization, Financial Development and Financial Crises," NBER Working Papers 21287, National Bureau of Economic Research, Inc.
    4. Peter Benczur & Cosmin Ilut, 2011. "Evidence for Dynamic Contracts in Sovereign Bank Lending," Working Papers 11-06, Duke University, Department of Economics.
    5. Schmelzing, Paul, 2017. "Staff Working Paper No. 686: Eight centuries of the risk-free rate: bond market reversals from the Venetians to the ‘VaR shock’," Bank of England working papers 686, Bank of England.
    6. Vitor Gaspar, 2014. "The Making of a Continental Financial System; Lessons for Europe from Early American History," IMF Working Papers 14/183, International Monetary Fund.
    7. Aguiar, Mark & Amador, Manuel, 2014. "Sovereign Debt," Handbook of International Economics, Elsevier.
    8. David G. Mayes, 2013. "The euro crisis," Chapters,in: Globalisation, the Global Financial Crisis and the State, chapter 11, pages 243-271 Edward Elgar Publishing.
    9. 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.
    10. Christiaan Bochove, 2014. "External debt and commitment mechanisms: Danish borrowing in Holland, 1763–1825," Economic History Review, Economic History Society, vol. 67(3), pages 652-677, August.
    11. Mark Aguiar & Manuel Amador, 2013. "Sovereign Debt: A Review," NBER Working Papers 19388, National Bureau of Economic Research, Inc.
    12. Adrian R. Bell & Chris Brooks & Tony K. Moore, 2014. "The credit relationship between Henry III and merchants of Douai and Ypres, 1247–70," Economic History Review, Economic History Society, vol. 67(1), pages 123-145, February.
    13. Di Liberto, Adriana & Sideri, Marco, 2015. "Past dominations, current institutions and the Italian regional economic performance," European Journal of Political Economy, Elsevier, vol. 38(C), pages 12-41.
    14. repec:ces:ifodic:v:11:y:2013:i:3:p:19099075 is not listed on IDEAS
    15. Johnson, Noel D. & Koyama, Mark, 2014. "Tax farming and the origins of state capacity in England and France," Explorations in Economic History, Elsevier, vol. 51(C), pages 1-20.
    16. Flores Zendejas, Juan, 2015. "Capital Markets and Sovereign Defaults: A Historical Perspective," Working Papers unige:73325, University of Geneva, Paul Bairoch Institute of Economic History.
    17. Rohan Pitchford & Mark L. J. Wright, 2013. "On the contribution of game theory to the study of sovereign debt and default," Oxford Review of Economic Policy, Oxford University Press, vol. 29(4), pages 649-667, WINTER.
    18. Vesperoni , Alberto, 2013. "War Finance and the Modern State," NEPS Working Papers 6/2013, Network of European Peace Scientists.
    19. Charles Angelucci & Simone Meraglia & Nico Voigtländer, 2017. "The Medieval Roots of Inclusive Institutions: From the Norman Conquest of England to the Great Reform Act," NBER Working Papers 23606, National Bureau of Economic Research, Inc.
    20. Mauricio Drelichman & Hans-Joachim Voth, 2013. "Contingent Sovereign Debt Contracts: The Historical Perspective," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(3), pages 28-32, October.

    More about this item

    Keywords

    sovereign debt; default; lending coalitions; sanctions; reputation;

    JEL classification:

    • 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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