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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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Paper provided by Vancouver School of Economics in its series Economics working papers with number mauricio_drelichman-2010-12.

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Length: 36 pages
Date of creation: 01 Apr 2010
Date of revision: 04 Jul 2011
Handle: RePEc:ubc:bricol:mauricio_drelichman-2010-12
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